AMEDU, AMEH JOSEPH

PG/Ph.D/04/35485

Ogbonna Nkiru

Digitally Signed by: Content manager’s Name

DN : CN = Webmaster’s name

O= University of Nigeria, Nsukka

OU = Innovation Centre

FACULTY OF SOCIAL SCIENCES

DEPARTMENT OF PUBLIC ADMINISTRATION AND

LOCAL GOVERNMENT

ADMINISTRATON OF NIGERIAN CAPITAL MARKET

AND NATIONAL DEVELOPMENT, 1980 – 2009

ii

ADMINISTRATON OF NIGERIAN CAPITAL MARKET AND

NATIONAL DEVELOPMENT, 1980 – 2009

BY

AMEDU, AMEH JOSEPH

PG/Ph.D/04/35485

DEPARTMENT OF PUBLIC ADMINISTRATION AND LOCAL

GOVERNMENT,

UNIVERSITY OF NIGERIA, NSUKKA

AUGUST, 2013

i

ADMINSTRATION OF NIGERIAN CAPITAL MARKET AND NATIONAL

DEVELOPMENT, 1980 – 2009

BY

AMEDU, AMEH JOSEPH

PG/Ph.D/04/35485

A DISSERTATION PRESENTED TO THE DEPARTMENT OF PUBLIC

ADMINISTRATION AND LOCAL GOVERNMENT UNIVERSITY OF NIGERIA,

NSUKKA IN FULFILLMENT OF THE REQUIREMENTS FOR AWARD OF

DEGREE OF DOCTOR OF PHILOSOPHY (PhD) IN THE PUBLIC

ADMINISTRATION

SUPERVISOR: PROF. CHIKELUE OFUEBE

AUGUST, 2013

ii

CERTIFICATION

Amedu Ameh Joseph, a postgraduate student in the Department of Public Administration and

Local Government with Reg. No. PG/Ph.D/04/35485 has satisfactorily completed the requirements

for the research work for the Degree of Doctor of Philosophy.

The work embodied in this thesis is original and has not been submitted in part or in full for

any other Diploma or Degree of this or any other University.

------------------------------ Amedu Ameh Joseph

PG/Ph.D/04/35485

-------------------------------- Prof. Chikelue Ofuebe (Supervisor)

iii

APPROVAL PAGE

This thesis has been approved for the Department of Public Administration and Local Government,

University of Nigeria, Nsukka.

BY

-------------------------------- -------------------------------- Prof. Chikelue Ofuebe (Supervisor) (Head of Department) Date: ------------------------------ Date: -----------------------------

-------------------------------- Date: -------------------------- Prof T.O.C Ugwu Dean of the Faculty

………………………….. External Examination

iv

DEDICATION

This work is dedicated to rural inhabitants of Nigeria who need capital market facilities most

for development of rural infrastructures.

.

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ACKNOWLEDGEMENTS

A large number of individuals have contributed to this project, I am grateful to all of them for

their help and encouragement. Like most work of this type, the project has also drawn from the

works of a large number of researchers and authors in the field of finance and public administration.

I express gratitude to my supervisor, Professor C. Ofuebe, who not only supervised the work,

but also taught me the art and skill of writing. He challenged me to think logically, helped me to

examine principles and valuable suggestions with his insights and creativity. I must humbly say that

his untiring and painstaking actions in the whole process of putting the work together surpass those

traditionally attributed to a supervisor. He made it easy to fulfill God’s will. I will always appreciate

his encouragement and support.

I also express gratitude to the former Head of Department - Professor F. Onah, and indeed

other lecturers for making suggestions for the improvement of this work. For extending their support

and encouragement, I am immensely grateful.

In addition, I sincerely appreciate the efforts of the following lecturers who distinguished

themselves in valuable suggestions and support. They remain pillars to the completion of this work.

Thanks to Professor F.C Okoli, who devoted time in reading and making valuable suggestions to the

success of the study. Equally, special gratitude is hereby expressed to Professor R.C Onah, Professor

Elekwa, Dr Ikeanyibe, Dr Amujiri, Dr Izueke, Dr Aglamanyi and host of others.

I appreciate the effort of the Staff of Department of Public Administration and Local

Government, especially – Mrs. Okafor - for their encouragement. I need to mention the names of

senior officers and friends who have been a source of motivation to me. They are Dr Laha Dzeve,

ex-chairman Benue State Primary Education Board, Mr. Peter Ker, late Mr. Acha, Hon Ekpiri, Mr

Yahuza; all of Benue State Primary Education Board.

My writing in this work has also been influenced by a number of standard and popular books

in the field. As far as possible, they have been fully acknowledged at the appropriate places. I

vi

express my gratitude to all of them. I have also tried to give credit to all sources from where I have

drawn materials in this work. Still there may have remained some errors. I shall feel obliged if they

are brought to my notice. I have also used published data of a number of organizations in Nigeria. I

am thankful to those organizations also

I remain grateful to my wife, Rose Amedu, and also our children Oka, Endurance, John and

Friday, who have always been a source of incessant motivation and encouragement to me and who

have always extended their unstinted support to me in writing this project. I also sincerely appreciate

the tireless effort of computer operator – Ogechi who worked day and night in ensuring the

completion of this work.

Finally, more thanks to the Almighty God for giving me life, energy and good health through

out the period of this work.

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ABSTRACT

The ascendancy of the Structural Adjustment Programme (SAP) as a policy platform made liberalization and privatization dominant themes of development strategies in Nigeria. Thus, the changed attitude towards the role of the private sector in the development of the Nigerian economy facilitated the expansion of the capital market. The market is a common feature of a modern economy and reputedly performs some necessary functions, which promote the growth and development of the nation. Capital markets facilitate the mobilization and allocation of medium and long-term funds for productive investment. Prior to the late 1980s, international donors and governments in developing countries held the notion that entrepreneurial functions could be better served by the state through public ownership of the means of production, taxation, licensing and regulation. However, poor performance of the public sector, misallocation of resources, market distortions and negative economic growth influenced a re-evaluation of the state-led development strategy. The objective of this study was to examine the administration of the Nigerian capital market and its effects on national development in the country from 1980 to 2009. The specific objectives of the study were to: (i) examine the administration of the Nigerian capital market and the mobilization of long-term funds for national development in Nigeria, and (ii) appraise the administrative roles of the Nigerian capital market in facilitating wealth creation and provision of long-term funds needed for national development in Nigeria. This study adopted a survey research design. Data collections were done through two main sources, namely primary and secondary sources. The primary sources were through interview. Interviews were conducted with the key stakeholders in the Nigerian capital market, namely the Director-General and five directors of the Securities and Exchange Commission, and the Chief Executive Officer of the Nigerian Stock Exchange and his three executive directors. The secondary data were collected from books, journals, periodicals, magazines, newspapers, government publications, conference papers, published and unpublished works of relevant authorities such as the Nigerian Stock Exchange Annual Report and Accounts, and the Central Bank of Nigeria (CBN) Statistical Bulletin. The primary data generated were analyzed using Chi-square. There was a significance association (p < 0.05) between the administration of the Nigerian capital market and mobilization of long-term funds for national development in the country from 1980 to 2009. The Nigerian capital market performed well within the period. The market experienced border listings and transactions, high influx of foreign investments and investors. Statistics showed purchases (inflow) by foreign investors during 2009 to be in excess of N228.986 billion, representing 33.4% of the aggregate turnover – an increase, when compared with the N153.457 billion recorded in 2008. Concurrently, total sales (outflow) during the year were in excess of N195.583 billion, culminating in a net inflow of N33.403 billion, a reversal of the net outflow of N480.5 billion in 2008. The average number of listed companies in the Nigerian stock market for 1980-1999 periods was 129 companies. At the end of 1999, the number of listed securities stood at 269 including 196 companies. The market boasted of over ten million shareholders. The administrative roles of the Nigerian capital market facilitated wealth creation and provision of needed funds for national development in the country during the period. Privatization provided additional listing on the stock market, enlarged equity shares, and injected new life into the market.

viii

TABLE OF CONTENTS

Title Page - - - - - - - - - - i Certification Page - - - - - - - - - ii Approval Page - - - - - - - - - - iii Dedication - - - - - - - - - - iv Acknowledgement - - - - - - - - - v Abstract - - - - - - - - - - vii Table of Contents - - - - - - - - - x List of Tables - - - - - - - - - xi Abbreviation and acronym - - - - - - - - - xii CHAPTER ONE: INTRODUCTION

1.1 Background to the Study - - - - - - - - 1 1.2 Statement of the Problem - - - - - - - 8 1.3 Objectives of the Study - - - - - - - - 12 1.4 Significance of the Study - - - - - - 12 1.5 Scope and Limitations of the study - - - - - - 13 CHAPTER TWO: LITERATURE REVIEW

2.1 Literature review- - - - - - - -- - - 15 2.1.1 The Concept of Capital Market and National Development - - 15 2.1.1.1 Capital Market - - - - - - - - 15 2.1.1.2 National Developments - - - - - - - - 19 2.1.2. Capital market and National Development in Nigeria - - 20 2.1.2.1 Development Indicators & Indices - - - - 20 2.1.2.2 Corporate Governance in Capital Market - - - - 25 2.1.2.3 Development and National Growth in Nigeria- - - - 27 2.1.2.4 National Development in Nigeria - - - - - - 27 2.1.2.5 Development- - - - - - - - 28

2.2 National Development Planning - - - - - - - 30 2.2.1 National Development Plan in Nigeria - - - - - 31 2.2.2 Problems of National Development in Nigerian - - - - 32 2.2.3 Models of Development Asia in Contes- - - - - - 33 2.2.4 Strategies for National Development - - - - - - 34

2.3 Capital Market - - - - - - - - - - 36 2.3.1 National Development and Growth in Nigeria -- - - - 39 2.3.2 Development and Administration of Nigeria Capital Market - - - 40 2.3.3 Historical Evolution of Nigeria Capital Market - - - - 70 2.3.4 Development of Nigeria Capital Market - - - - - 78 2.3.5 Administration Challenges Confronting the Nigeria Capital Market - 80 2.3.6 The Nigerian Capital Market - - - - - - - 81 2.3.7 NSE, Crisis the Root Cause - - - - - - - 84 2.3.8 Manifestation of the Crisis - - - - - 85 2.3.9 NSE; Response and Management - - - - - 87 2.3.10 Impact of the crisis on Capital market - - - - - 89 2.3.11 Other Impacts of the crisis on the capital market - - - 93 2.3.12 Performance of the Nigerian Capital Market - - - - 94

ix

2.3.13 Capital Market and Economic growth of countries - - - 102 2.3.14 Characteristics of Nigerian Capital Market - - - - - 105

2.2.15 Empirical Studies on the Impact of Stock Market on Economic Growth- - - - - - 108 2.4 Gap in the Literature - - - - - - - - 109 2.5 Theoretical Framework - - - - - - - - 110 2.6 Hypothesis - - - - - - - - - 114 2.7 Operationalization of Key Concepts - - - - - - 114

CHAPTER THREE: AREA OF STUDY AND RESEARCH PROCEDURE

3.1 Area of Study - - - - - - - - - - 117 3.1.1 Review of the Rules and Regulations - - - - - 121 3.1.2 Operations of Nigerian Capital Market in enabling companies to Raise capital at a lower cost - - - - - 122

3.2 Research Procedure - - - - - - - - 124 3.2.1 Research Design - - - - - - - 124 3.2.2 Population of the Study - - - - - - - 127 3.2.3 Sample and Sampling Procedure of the Study - - - - 127 3.2.4 Sources and Method of Data Collection - - - - - 128 3.2.5 Primary Sources of Data Gathering - - - - 128 3.4.6 Secondary Sources of Data Gathering - - - - - 129

3.3 Reliability and Validity of the Instruments - - - - 130 3.4 Method of Data Presentation and Analysis - - - - 130

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND FINDINGS

4.1Data Presentation and Analysis - - - - - - - 132 4.1.1 The Nigerian Capital Market, Wealth Creation and Provision of long-term funds for national development in Nigeria, 1980-2009- - - 133 4.1.1.1 The Nigerian Capital Market and Its Roles in the National development - 138 4.1.1.2Activity in the Nigerian Secondary Market -- - - - - - - - - 144 4.1.1.3 Influence of Nigerian Capital Market on Individual Savings in national development - - - - - 149

4.2 Administrative Challenges Confronting the Nigerian Capital Market hindering its efficiency in mobilizing long-term funds for national development - - - - - - - - - 152 4.2.2.1 The Global Financial Crisis hindered the Nigerian Capita market Efficiency

in Mobilizing Long-Term Funds for national Development- - - 162 4.2.2.2 Effects of the Global Recession on the Nigerian national development 162 4.2.2.3 Global Inflation effects on the Nigerian capital market- - - 168 4.2.2.4 Global Commodity Demand and Prices on the Nigerian capital market- 170 4.2.2.5 World Trade effect on the Nigerian capital market - - - 171 4.2.2.6 International Financial Markets effects on the Nigerian capital Market-- - - - - - - - 171 4.2.2.7 Money Markets effects on the Nigerian capital market - 171 4.2.2.8 Capital Markets and administrative challenges confronting the Nigerian capital market in mobilizing long-term funds for national

x

development in the country - - - - - - 179 4.2.2.9. The International Foreign Exchange Market effect on the Nigerian capital market - - - - - - - 182 4.2.2.10 Central Bank Interest Rate Policies effects on the Nigerian Capital market - - - - - - - - 183 4.2.2.11 Foreign Portfolio Investment on Administrative Challenges Confronting the Nigerian capital market in mobilizing long-term funds for national development - - - - - - - 184 4.2.2.12 Effect Of Global Recession on the on the Nigeria capital market - 186

4.3 Measures to Enhance the Capacity of the Administrative Efficiency of Nigerian Capital Market in Mobilizing Funds for National Development in Nigeria - - - - - 188

4.3.1 Privatization of the Public Enterprises - - - - - 188 4.3.2 Deregulation of the financial sector - - - - - - 193 4.3.3 Monetary reforms & Administrative Challenges of the Nigeria

Capital Market - - - - - - - - 200 4.3.4 Upgrade of market Technology - - - - - - - 203

CHAPTER FIVE: Summary of Findings and Discussion

5.1 Summary of Findings - - - - - - - - 206 5.2 Discussion - - - - - - - - - 218 CHAPTER SIX: Summary, Recommendations and Conclusion

6.1 Summary - - - - - - - - - 221 6.2 Recommendations - - - - - - - - 223 6.3 Conclusion - - - - - - - - 224 Bibliography - - - - - - - - - - 225Appendices - - - - - - - - - - 233

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LIST OF TABLES

Table 2.1: Market Indices - - - - - - 22

Table 2.2: Nigerian Interbank Offer Rate - - - - 26

Table 2.3: Open Buy Back - - - - - 27

Table 2.4: Exchange Rates - - - - - 28

Table 2.5: Swap and Forward Quotes NIFEX (Closing- 31March 20O9) - 29

Table2.6: Spot NIFEX - - - - 29

Table 2.7: Retail Dutch auction System - - - - 29

Table 2.8: Treasury Bill Rate - - - - - - - 30

Table 2.9: PMA - - - - - - - - 30

Table 2.10: OMO - - - - - - - - 30

Table 3.1: Samples of Interviewees - - - - - - 62

Table 4.1: Statistical Summary of Market Performance in 2008 & 2009 - 70

Table 4.2: Statistical summary of market performance in US dollars - 72

Table 4.3: Statistical Summary of Emerged Companies with the Highest

Market Capitalization - - - - - - - 75

Table 4.4: Top five new Issues Approved in 2009 . . - - 78

Table 4.5: Statistical summary of Exchange’s Turnover Ratio - - 79

Table 4.6: Traded and Turnover Ratio - - - - - 85

Table 5.1: Growth in the Number of Listed Securities 1980-1999 - - 147

Table 5.2: The Nigerian Stock Exchange All-Shares

Index Percentage Change (1984-1999) - - - 150

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ABBREVIATIONS AND ACRONYMS

ASI - All-Share Index

AMC - Asset Management Company

ATS - Automation of the Trading System

CRR - Cash Reserve Requirement

CSCS - Central Security and Clearing System

CBN - Central Bank of Nigeria

DMO - Debt Management Office

ETF - Exchange Traded Funds

FGN - Federal Government of Nigeria

FSRCC Financial Sector Regulation Coordinating Committee

FDI - Foreign Direct Investments

FSRCC Financial Sector Regulation Coordinating Committee

GDR - Global Depositary Receipts

GDP - Gross Domestic Product

IPO - Initial Public Offers

IFRS - International Financial Reporting Standards

IMF - Iinternational Monetary Fund

IOSCO International Organization of Securities Commissions

ISA - Investment and Securities Act

NIBOR Nigerian Inter-Bank Offer Rate

NSE - Nigerian Stock Exchange

MPC - Monetary Policy Committee

OMO - Open Market Operation

OTC - Over the Counter

PDMM Primary Dealer Market Marker

REIT - Real Estate Investment Trust

RDAS Retail Dutch auction System

SEC - Securereties and Exchange Commission

SSM - Second-Tier Securities Markets

SAP - Structural Adjustment Program

1

CHAPTER ONE: INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Prior to the late 1980s, international donors and governments in developing countries

held the notion that entrepreneurial functions could be better served by the state through

public ownership of the means of production, taxation, licensing and regulation. Wikipedia

Encyclopedia defines capital markets as the financial markets for the buying and selling of

long-term debt or equity-backed securities. These markets channel the wealth of savers to

those who can put it to long-term productive use, such as companies or governments making

long-term investments. Financial regulators, such as the UK's Bank of England (BoE) or the

U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their

jurisdictions to protect investors against fraud, among other duties.

Modern capital markets are almost invariably hosted on computer-based electronic

trading systems; most can be accessed only by entities within the financial sector or the

treasury departments of governments and corporations, but some can be accessed directly by

the public. There are many thousands of such systems, most serving only small parts of the

overall capital markets. Entities hosting the systems include stock exchanges, investment

banks, and government departments. Physically the systems are hosted all over the world,

though they tend to be concentrated in financial centers like London, New York, and Hong

Kong. Capital markets are defined as markets in which money is provided for periods longer

than a year.

A key division within the capital markets is between the primary markets and

secondary markets. In primary markets, new stock or bond issues are sold to investors, often

via a mechanism known as underwriting. The main entities seeking to raise long-term funds

on the primary capital markets are governments (which may be municipal, local or national)

and business enterprises (companies). Governments tend to issue only bonds, whereas

2

companies often issue either equity or bonds. The main entities purchasing the bonds or stock

include pension funds, hedge funds, sovereign wealth funds, and less commonly wealthy

individuals and investment banks trading on their own behalf. In the secondary markets,

existing securities are sold and bought among investors or traders, usually on an exchange,

over-the-counter, or elsewhere. The existence of secondary markets increases the willingness

of investors in primary markets, as they know they are likely to be able to swiftly cash out

their investments if the need arises. A second important division falls between the stock

markets (for equity securities, also known as shares, where investors acquire ownership of

companies) and the bond markets (where investors become creditors). Microsoft Encarta 98

Encyclopedia (1998) identified the following reasons for government ownership of

enterprises. Ensure safety or security, Re-distributive goals, Prevent monopolization,

Government controls distribution, Public firms less likely to use price discrimination,

Government captures substantial market profits, Macroeconomic stabilization, Developing

Countries, and Government has political control

Private entrepreneurs were perceived to be few; while local subsidiaries of

multinational firms constituted a considerable chunk of local private sector activity.

However, poor performance of the public sector, misallocation of resources, market

distortions and negative economic growth influenced a re-evaluation of the state-led

development strategy. In the past 30 years, liberalization and privatization have become

dominant themes in development planning and strategies particularly in Africa. Donors,

governments and development practitioners have exhibited changing attitudes towards the

role of the private sector in the development of African economies and, accordingly, have

acknowledged the need to facilitate private sector development (Kibuthu, 2005).

In addition, Yartey (2008) argues that the promotion of economic growth led by the

private sector requires the creation of an enabling environment within which the private

3

sector can flourish. A key factor is the healthy growth of a nation’s financial sector, which in

turn improves the private sector’s access to services such as bank credit, equity capital,

payments and risk management services. Generally, the development of the financial sector

has followed a trend beginning with the channeling of savings and `investments through

banks, followed by the development of capital markets as investors or savers search for

higher-returns, and firms seek cheaper capital.

Furthermore, Yartey and Adjabi (2007) posit that financial markets typically comprise

several institutions including banks, insurance companies, mutual funds, mortgage firms,

finance companies and stock markets. Nevertheless, Miller (1995) argued that in developing

countries, particularly in Nigeria, financial markets are dominated by commercial banks,

which have not been reliable sources of long-term financing for businesses. The non-bank

sources of medium and long-term financing are generally underdeveloped. Kibuthu (2005)

contends that the short-term nature of commercial banks’ assets and liabilities as well as

regulatory reserve requirements in many countries render those banks incapable of supplying

long-term capital.

Jeffrey and Michael (2005) argue that heavy reliance on banks increases the

vulnerability of the financial system as exemplified by the Asian financial crisis in the 1990s.

Having a functioning financial system, which includes non-bank financial institutions, can

protect economies from financial shock. Sam (2001) surmises that in this regard, capital

markets are considered better avenues for mobilizing domestic and international capital.

The capital markets have the potential to meet the fixed-capital needs of the private

sector. They can ensure the efficient and sustainable funding of governments, corporations,

banks and large-scale or long-term projects (Kibuthu, 2005). In addition, capital markets

facilitate the mobilization and allocation of medium and long-term funds for productive

investment by:

4

Providing a simple mechanism for the transfer of funds;

� Facilitating companies’ access to a large number of local and foreign investors;

� Widening the array of financial instruments available to savers and investors;

� Increasing the diversity and competition in the financial systems; and

� providing market signals on current situations and future expectations.

Generally, the effective functioning of capital markets requires the following:

� Existence of an exchange, clearing and settlement system;

� Existence of a legal system to enforce contracts;

� Availability of information on financial soundness and

� Future prospects of companies and governance of corporations in a manner that gives the

investors’ confidence that their funds will not be stolen or wasted (Sam, 2001).

Meanwhile, developing countries are working towards reforming and deepening their

financial systems, through the expansion of their capital markets in order to improve their

ability to mobilize resources and efficiently allocate them to the most productive sectors of

the economy. A significant policy change has been the establishment of privatization

programs, which have facilitated reduction in public debt, improved incentives and efficiency

in the operations of the privatized entities, and facilitated better access to capital through the

floating of shares to the general public (Claessens, 2005).

Mohtadi and Argarwal (2004) posit that large capital markets lower the cost of

mobilizing savings and facilitating investments in the most productive technologies. Thus,

5

Adebiyi (2005) argues that all over the world the capital market has played significant roles

in national economic growth and development.

Thornton (1995) argues that economic activities in a country constitute the key drivers

of capital market development. Growth in the capital market spurs economic development

[Yartey 2008) and empirical evidence shows that there is no sharp demarcation existing

between developments in the capital market and economic growth [Filer 2002). Yartey and

Adjasi (2007) argue that the establishment of capital markets in Africa is expected to boost

domestic saving and increase the quality and quantity of investments. They emphasize that in

principle the capital market is expected to accelerate economic growth by providing a boost

to domestic savings and increasing the quality and quantity of investments. Equally, capital

markets can increase economic development by making available information on firms’

prospects and redistributing investable capital.

Thus, the capital market has contributed to the financing of the growth of large

corporations in certain African countries and those large corporations in Africa have made

considerable use of the capital market to finance their growth [Yartey and Adjasi 2007). The

fact, essentially, is that no matter the extent of argument that exists, the main essence of the

capital market is to consolidate growth in the financial system and enhance the consequent

impact of the later on economic development in the country.

Nigerian capital market started rolling from 1960 when Nigerian Stock Exchange

(Lagos stock) exchange was opened. At present the market is gaining depths and becoming

steady. This stock exchange is the pivot of the Nigerian capital market.

This exchange is providing different types of funds to bring the accumulated public wealth

into the stock market. At the same time, the large-scale industries of Nigeria are listed on this

exchange. There is also another stock exchange in Nigeria that is working with the medium

6

and small-scale industries of the country and providing good support to strengthen the

Nigerian capital market.

The development of the Nigerian capital market has some other reasons too. A

number of Nigerian banks are investing in the Nigerian stock market so that they can roll the

money and can earn some good profit from the market.

The recently introduced minimum capital requirements for the bank have encouraged

the banks to choose the stock markets. The Nigerian capital market is still gaining depth and

so that it was a bit risky for the banks to take the decision but they took the risk and the

results are very positive.

It not only encouraged the individual investors but at the same time provided some

good support to the growth of the Nigerian capital market. It is true that the Nigerian capital

market is performing well and the country is experiencing some historical public offers by the

banks like the Zenith Bank. But at the same time, it is also true that the market has to go a

long way to because still now the NSE's market capitalization is, much lower than the GDP.

According to the ongoing trends, the market capitalization should be nearer to the

GDP or in certain cases it is more than the GDP as in the case of Johannesburg that recorded

239% of GDP. The turnover ratio of Nigeria stock exchange was 12.4% in 2005. The

Nigerian bond market is also passing through a developing phase.

The main participants of the Nigerian capital market are the Securities and Exchange

Commission (regulatory), Nigerian Stock Exchange, stock brokers, trustees, issuing houses,

registrars. The investments are done by the insurance companies, pension funds, institutional

investors and the individual investors.

More Information in Capital Market

7

1.2 STATEMENT OF THE PROBLEM

With the ascendancy of the Structural Adjustment Program (SAP) as a policy

platform, liberalization and privatization have become dominant themes in development

strategies in Nigeria. Thus, the changing attitudes towards the role of the private sector in the

development of Nigerian economy have facilitated the development of the capital market. In

the 1990s, many countries in Africa set up capital markets as a precondition for the

introduction of market economies under the SAP propagated by the international monetary

institutions, and to facilitate the privatization of state-owned enterprises.

However, the development of the Nigerian Capital Market dates back to the late

1950s when the Federal Government, through its Ministry of industries set the Barback

committee to advise it on the ways and means of setting up a capital market. During that

period, financial operators in Nigeria comprised mainly foreign-owned commercial banks

that provided short-term commercial trade credits for the overseas companies with offices in

Nigeria (Nwankwo, 1991). Their capital balances were invested abroad in the London Stock

Exchange. Thus, the Nigeria government in an attempt to accelerate economic growth

embarked on the development of the capital market. This is to provide local opportunities for

borrowing and lending of long-term capital to the public and private sectors as well as

creating opportunities for foreign-based companies to offer their shares to the local investors

and provide avenues for the expatriate companies to invest surplus funds in Nigeria.

Based on the report of the Barback Committee, the Lagos Stock Exchange was set up

in 1959. With the enactment of the Lagos Stock Exchange Act 1959, the Exchange

commenced business in June, 1961. It assumed the major activities of the stock market by

providing facilities for the public to trade in shares and stocks, maintaining fair prices

through stock-jobbing and restricting the business to its members. The Lagos Stock Exchange

was renamed the Nigeria Stock Exchange in 1977, with the following objectives:-

8

• To provide facilities to the public in Nigeria for the purchase and sale of funds, stocks

and shares of any kind and for the investment of money. To regulate the dealings of

members’ interests and those of their clients.

• To control the granting of a quotation on the stock exchange in respect of funds, stocks

and shares of any company, government, municipality local authorities or other

corporate bodies.

• To promote, support or propose legislative or other measures affecting the above

objectives.

According to its Memorandum and Articles of Association, the Exchange is

incorporated as a private non-profit organization limited by guarantee to undertake three

basic functions, which include:

� Provide trading facilities for dealing in securities listed on it;

� Oversee activities relating to trading in securities; and

� Enhance the flow of long-term capital into productive investment and ensuring fairness

of prices at which quoted securities are traded.

Initially, trading activities commenced with two Federal Government Development

Stocks: one preference share and three domestic equities. The market grew slowly during the

period with only six equities at the end of 1966 compared with three in 1961. Government

stocks comprised the bulk of the listing with 19 of such securities quoted on the Exchange in

1966 compared to six at the end of 1961. (Nnanna, Englama and Odoko, 2004). Prior to 1972

when the indigenization exercise took off, activities on the Nigerian Exchange were low, in

terms of the value and volume of transactions. For instance, the value of transactions grew

from Nl.49 million in 1961 to N16.6 million in 1971. Similarly, the volume of transactions

grew from 334 to 634 over the same period; though the bulk of the transactions were in

9

government securities, which were mainly development loan stock through which the

government raised money for the execution of its development plans. Accordingly, with the

promulgation and implementation of the Nigeria Enterprises Promotion Decree of 1972,

(whose principal objectives included promoting capital formation, savings and investment in

the industrial and commercial activities of the country), the low level of activities in the

capital market increased as Nigerians gained the commanding heights of the economy (Ewah,

Esang and Bassey 2009).

However, following the criticisms that the Nigerian Stock Exchange was not

responsive to the needs of local investors, especially indigenous businessmen who wished to

raise capital for their businesses, the NSE, introduced the Second-Tier Securities Markets

(SSM) in 1985 to provide the framework for the listing of small medium-sized Nigeria

companies on the Exchange. Six companies were listed on this segment of the capital market

by 1998 and by 2002, over twenty-three companies had availed themselves of the

opportunities offered by this market (Nnanna, Englema and Odoko, 2004).

The major instruments or products available in the Nigerian capital market to date

include the industrial equities otherwise referred to as ordinary shares; industrial loans such

as debentures, unsecured zero coupons, preference shares, bonds/stocks, specialized project

loans/infrastructural loans, government stock/bonds, unit trust schemes, unlisted

corporate/industrial loans; among others. The market is currently divided into two broad

categories namely equities and debt markets. The equities are instruments or products that

confer ownership rights on the investor, while the debt markets are interest-bearing

obligations with fixed or floating interest-rates. Thus, Ekezie (2002) noted that capital market

is the market for dealings (i.e. lending and borrowing) in longer-term loan able funds. Mbat

(2001) described it as a forum through which long-term funds are made available by the

surplus to the deficit economic units. Companies can finance their operations by raising funds

10

through issuing equity (ownership) or debenture/bond as securities. Equities have perpetual

life while bond/debenture issues are structured to mature in periods of years varying from the

medium to the long-term of usually between five and twenty-five years.

The capital market offers access to a variety of financial instruments that enable

economic agents to pool, price, and exchange risks. Assets with attractive yields, liquidity

and risk characteristics, encourages savings in financial form. This is very essential for

government and other institutions in need of long-term fund and for suppliers of long-term

funds (Nwankwo, 1991).

Based on its importance in accelerating economic growth and development,

governments of most nations tend to have keen interest in the performance of its capital

market. The concern is for sustained confidence in the market and for strong investors’

protection arrangements. Nigerian Securities and Exchange Commission (SEC) is the

government agency responsible for developing and regulating the Nigerian capital market. It

was created by Act No. 71 of 1979 and re-acted as Securities and Exchange Commission

Decree No. 29 of 1988. The SEC purses its objectives by registering all market operators

based on capital adequacy, competence and solvency as criteria (Ariyo and Adclegal, 2005).

The Nigerian Capital Market which is a member of the Nigerian financial system is a market

that provides an avenue for the mobilization of long-term funds. This market serves the needs

of industries, the commercial sector, government and local authorities, which are big

borrowers of funds.

The Nigerian capital market consists of two markets, (Primary and Secondary

markets) and some operational institutions. The main institutions in the capital market are the

Securities and Exchange Commission (SEC), which is at the apex and represents the

regulatory authority for the market, the Nigeria Stock Exchange (NSE), the issuing houses

and the stock broking firms. The Secondary Market in Nigeria is the NSE where dealings in

11

existing claims are traded. In general, the Nigerian capital market helps to stimulate

industrialization and development in the Nigerian economy. It also improves the growing of

domestic corporate sector and helps to reduce dependence on borrowing. Access to finance

for new and smaller companies and also the encouragement of institutional development are

based on the framework provided by the market.

The mere presence of a capital market in a country boosts the international investment

climate as it raises the chances of additional local financing for both foreign and local direct

investment. Secondly, the capital market has provided opportunity for investment

diversification. A large part of wealth currently invested in Nigeria would have been diverted

to foreign countries but for the presence of the capital market. It, therefore, remains a viable

institution for holding back capital flight thereby reducing underdevelopment of the

economy. Thirdly, the capital market enabled mass participation in the privatization exercise

as it did during the implementation of the indigenization program, thereby ensuring that a

large number of Nigerians benefited from the ownership of the divested assets. The sale of

public wealth through privatization would have benefited a few rich persons, thereby

worsening income inequality if a capital market was absent.

Levine and Servos (1998) postulated a strong positive relationship between capital

market development and long-term development. Equally, capital market liquidity plays vital

roles in the process of development (Bencivenga, et al, 1996).

The capital markets in Nigeria create a free entry and exit for investors. In a private

company, it is not easy for an investor (shareholder) to withdraw capital invested without

upsetting the company’s capital structure. But for public-quoted companies, as long as an

investor's broker can find prospective investors to buy the client's shares, the process is over.

One of those important functions of the capital market is to encourage indigenous

enterprises to develop its peculiar technologies through accessibility to funds and expertise

12

through international connections. This, it has achieved, tremendously. Moreover, most of the

enterprises benefited from the implementation of the Nigerian Enterprises Promotion Act and

the privatization policies through the market. Both policies promoted indigenous enterprises,

which are the main engines of development in an economy.

Despite the capital market’s laudable performance and benefits, it is still beclouded

with some weaknesses in Nigeria. The bureaucratic system of the Securities and Exchange

Commission is a hindrance to the smooth processing of applications submitted to it. The

private sector to which most enterprises belong is not used to this bureaucratic system of the

public sector. The fees charged by the Exchange are unreasonably high and constitute a great

burden on enterprises/companies.

Based on the foregoing discussion, the following research questions guided the study:

(1) Has the Nigerian capital market facilitated wealth creation and provision of long-term

funds needed for national development in Nigeria from 1980 t0 2009?

(2) To what extent has the Administration of the Nigeria capital market affected the

mobilization of long term funds for national development in the country?

(3) What measures could be proffered to enhance the capacity of the Nigerian capital

market in mobilizing long term funds for national development in the Nigeria?

1.3 OBJECTIVES OF THE STUDY

The general objective of this study was to examine the roles played by the Nigerian

capital market in mobilizing long-term funds for economic development in the country from

1980 to 2009.

13

The specific objectives of the study were to:

(1) Analyze the roles of the Nigerian capital market in facilitating wealth creation and

provision of long-term funds needed for national development in Nigeria from 1980

to 2009.

(2) Examine the challenges confronting the Administration of the Nigerian capital market

in mobilizing long term funds for national development in the country.

(3) Articulate measures that could be implemented to enhance the capacity of the

Nigerian capital market in mobilizing long term funds for national development in the

Nigeria.

1.4 SIGNIFICANCE OF THE STUDY

This study has theoretical and empirical significance. Theoretically, the work

provided the linkage and relationship between growth in the capital market and economic

development in Nigeria. While some suggest that capital market development has a negative

effect on economic growth, others strongly believe that capital market development has a

direct link to economic growth. They argue that the role of Capital Market is to allocate the

scarce savings to productive investment, to channel funds to investors at a minimum cost and

that prices are used as a signal for capital allocation. The study examined whether there is a

strong empirical association between capital market development and long-term economic

growth. In this regard, it evaluates this association by analyzing measures such as stock

market size, liquidity, and integration with world markets, into index of stock market

development.

In addition, this study examined how the growth rate of Gross Domestic Product

(GDP) and per capital income regressed in a variety of variables designed for control at initial

conditions, such as political stability, investment in human capital and others, affects

14

economic growth. A correlation is drawn between overall capital market development and

long-term economic growth.

Empirically, this work helps lead to more exposure about the capital market, the way it

operates and runs. The benefits the investing public such as shareholders, bondholders, stock

brokers, agents in the capital market, etc and the governments stand to gain if they make

proper use of the capital market.

Secondly, it also shows practitioners how investments in the capital market help in

facilitating economic development. Developmental program based on capital market is likely

to accelerate economic growth because some capital projects like transport, markets,

education, health etc can be well and easily funded in the capital markets.

Finally, industries and firms can grow easily through capital market than any other

form of funding arrangement. Consequently, this study enlightens the investing public on

how to monitor the fluctuations of the stock exchange prices and how to make good

judgement for investments.

1.5 SCOPE AND LIMITATIONS OF THE STUDY

As the global economic crises deepen, capital markets around the world are facing

competition both from each other and from new high-technology entrants. It seems likely that

there will be continued trend towards concentration of securities trading in a few leading

centers with domestic stock exchange in some countries becoming increasingly irrelevant.

The scope of this study therefore was the analyses of the roles played by Nigerian capital

market in the national development of the country. It concentrated on the possibility of the

Nigerian capital market in surviving the global economic problems and meets the

expectations of Nigerians in solving her numerous economic needs. Development of the

Nigerian capital market dates back to the late 1950s when the federal government through its

15

ministry of industries set up the Barback committee. As at that time financial operators in

Nigeria were mainly foreigners that provided short-term loans through their commercial

banks. Their capital balances were invested abroad in the London stock exchange. In an

attempt to accelerate economic growth, the period of 1980s witness the establishment of the

Securities and Exchange through decree 29 of 1988. The period, 1980 to 2009, witnessed

great innovation in the Nigerian capital market this is the period when most privatized public

owed enterprises were carried out. The period witnessed the federal and state governments

offering bonds and many indigenous companies such as first bank plc, Nigerian breweries,

zenith bank and seventeen others joining the capital market.

The limitation of this study is difficulties in getting relevant information from the

various areas of the study such as the Central Bank of Nigeria, the Securities and Exchange

Commission and Ministries of Finance, Industries and Commerce, the Debt Management

Office of Nigeria who in most cases regards the needed information as secret that could not

be divulged to outsiders. These problems, however, were overcome through the use the

enormous information on the capital market, in the news media, journals and Internet.

16

CHAPTER TWO

LITERATURE REVIEW

2. 1 LITERATURE REVIEW

The literature review focuses on the following sub-themes:

• The Concepts of Capital Market and National Development.

• Capital Markets and National Development in Nigeria

• Development and Administrative Challenges Confronting the Nigerian Capital

Market

• Capital Market and Economic Growth of Countries.

2.1.1 The Concepts of Capital Market and National Development

2.1.1.1 Capital Market

In recent times, research interests have focused on investigating whether capital

markets, especially in developing countries, have achieved the development-oriented goals

for which they were originally conceived. The concept of capital market liquidity, for

instance, has been used to demonstrate how developments in the securities market transmit to

economic growth. This liquidity argument is based on the proposition that capital markets

enable firms to acquire much needed capital quickly and, by so doing, helps in facilitating

capital allocation, investment, and growth. It also assists in reducing investment risk due to

the ease with which equities are traded and play crucial role in helping to determine the level

of economic activities in most economies (Yartey and Adjasi, 2007). Some other major

studies that investigated the link between capital market and economic growth - including

King and Levine (1993), Levine and Zervos (1996), as well as Harris (1997)'- equally

reached similar conclusions that indeed, some definite kind of relationship exists between

capital market development and economic growth.

17

The results of a study carried out by Adjasi and Biekpe (2006), which examined the

effect of capital market development on economic growth in 14 African countries, revealed a

positive relationship between the two and indicated that capital market developments played

a significant role in growth only for moderately capitalized markets. On the basis of these

results, they recommended that low income African countries and less developed capital

markets needed to grow more and develop their markets to elicit economic gains from capital

markets. Some other studies have equally found evidence in support of the argument that a

significant positive relation between savings and capital market size and liquidity do exist

and that a growing or deepening capital market would not necessarily' spore higher savings

rate. Using four countries, Caporale et al. (2005) examine the hypothesis of endogenous

growth models that financial development caused higher growth through its influence on the

level of investment and its productivity. The study revealed that indeed, investment

productivity was the channel through which capital market development enhanced the growth

rate in the long run.

Another aspect of the argument is the belief that the capital market can be used to

instill operational efficiency, in firms, Thus, the consciousness that its stock price captures

information relating to how it is being run is likely to cause a company to be better managed

(Beccalli et al 2006). Such efficiency consciousness may no doubt be transmitted into the

wider macro-economic management, which consequently would lead to economic

development in the country. Providing further illustrations on how this transmission takes

place, Yartey and Adjasi (2007) argue that capital markets equally provide an avenue for

growing companies to raise capital at a lower cost, while positively influencing individual

savings in the economy; and that companies in countries with developed capital markets are

less dependent on bank financing, which can reduce the risk of a credit crunch. In another

study by Henry (2000), it was empirically established that capital market liberalizations have

18

the capacity of leading to private investment booms. He found that of a sample of 11

developing countries that liberalized their capital markets, 9 experienced growth rates of

private investment above their non-liberalization median in the first year after liberalizing,

where as in the second and third years after liberalization, 10 of 11 and 8 of 11. Respectively,

witnessed the same growth trends. Levine (1997) argues in support that as more foreign

investors enter the market, pressure will be applied to upgrade trading systems and modify

legal frameworks to support a greater variety of financial instruments.

A study by Osinubi and Amaghionyeodiwe (2003).Using Nigerian data provided

some dissenting evidence that capital market development statistically had no significant

effect on economic growth in Nigeria during the period 1980 to 2000. They interpreted the

results to mean that the Nigerian Capital Market was unable to make significant contribution

to rapid economic growth because of the existence of certain policies that blur the

effectiveness of the vehicle or transmission mechanism through which capital market

activities influence economic growth. This result confirms the position of Singh (1999) that

the capital market might not perform efficiently in developing countries and that it may not

be feasible for all African markets to promote capital markets given the huge costs and the

poor financial system. Interestingly, the significant growth recorded in most of the exchanges

in the region, from 2000 to date, have invalidated the claims made by Osinubi and

Amaghionyeodiwe (2003) and Singh (1999): and have instead projected the hypothesis tested

by Adjasi and Biekpe (2006). Implied here is the claim that African capital markets have

been unable to induce economic growth because of their relatively small sizes.

However, critics on the role of capital market in economic development concentrate

more on the fact that without efficient and well-developed financial system, the acclaimed

benefits may not be realized. In developing and inefficient systems, for instance, the capital

market may not be able to reflect real fundamentals and may mislead investors from making

19

optimal investment decisions. In such situation, capital market growth may not be able to

influence meaningful development in the general economy. Along this line, Yartey and

Adjasi (2007) posit that the higher degree of price volatility on capital market in developing

countries reduces the efficiency of the price signals in allocating investment resources - a

situation that has given rise to a crucial question over the importance of the system in

promoting economic growth in African countries. It is also possible that such development

may be capable of eroding investors’ confidence in the Exchange and the capital market in

general.

Notwithstanding, popular claims that a good number of capital markets in Africa are

emerging and witnessing rapid growth, there are still some doubts about their ability to play a

linkage role between the market and the wider economy. While, for instance, few stocks

remain active and make up a bulk of the total market capitalization, serious informational and

disclosure deficiencies remain very prevalent amongst most capital market (Yartey and

Adjasi, 2007). Essentially, those ingredients, outlined Asiedu (2006) as bases for attracting

capital flows, are still conspicuously missing in most of the African economics. Some of such

ingredients include: sustained economic growth, quality public institutions and infrastructure,

trade liberalization, and efficient capital markets.

The current realities existing in most of the Exchanges in Africa today leave some

significant gap in the debate on the impact of capital market growth on economic

development. In the case of Nigeria, for instance, the level of growth in the capital market

(measured by growth in total market capitalization) by far outweighs the GDP growth rates in

the country. A special consideration is given to investments as an endogenous variable

because of its central position in general economic development models.

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2.1.1.2 National Development

Development is a word that has continued to receive diverse interpretation and

explanation among scholars and researchers. The concept, as a result, suffers from a surfeit of

meaning. Also, there is no generally acceptable operational definition of what development

is, nor is there a consensus regarding how development can be pursued. This can be attributed

to the multi-dimensional, multi-disciplinary and value-orientation of the concept.

Development, in its most simplistic definition means progress. It presupposes change

for the better. Development is dynamic: it is continuum with situations. It represents

transformation from a primitive to a civilized one. It refers to an increase in the earnings of a

nation and consequent increase in its foreign exchange earnings. It also refers to an increase

in the standard and quality of lives of the people. In intellectual circles, development has a

multi-angular definition, through this multi-angularity converges towards the same point.

According to Rodney (Rodney 1974), it would include the individual in the society. Opubor

(1985), agrees with Rodney when he opines that “There can be no far-reaching social change

unless it affects the lives of the majority of people” similarly, national development refers to

the gradual manifestation of positive changes in the economic, industrial, political, social-

cultural and administrative life of a country. It involves large quality and high quality of

productive resources as well as deficiency in using them. National development according to

(Ogai 2003), “deals with human endowments, natural/physical, psychological and other

factors”, national development goes beyond having plenty of money, it embraces all aspects

of social behavior such as establishment of law and order, resourcefulness in business

dealings, honesty in business relations, sophistication, broadmindedness, familiarity with

science, modern technology and mechanical gadgets and overall positive national outlook.

National development has three major aspects;

• Economic and social aspect,

21

• Political and cultural aspects and

• Industrial and administrative aspect.

The forgoing discussion, suggest that individual is a contributing member of the

society and his self-improvement is tantamount to improvement in the society. Thus, the

individual and his society are intricately linked. The trust of this argument is that human

resources are most valuable assets any nation can possess to advance economically, socially

as well as politically, to develop. It stands to reason therefore, that whatever needs to be done

to make human resources to operate at the optimal level should be encouraged.

2.1.2 Capital Markets and National Developments in Nigeria

2.1.2.1 Development indicators and indices

The concept that complexity can be briefly summarized in a single statement, picture

or measure is indeed an old one. The world is a complex place and human beings have

always sought ways of interpreting what they sense around them so as to help deal with that

complexity.

Given the pressing need to help address human suffering and poverty wherever it is

found the appeal of ways to present this complexity in ways that help an intervention is thus

highly understandable. Development indicators and indices (index: an aggregation of

indicators into a single representation) seek to do just that – to simplify so as to manage.

Indicators have largely been quantitative rather than qualitative, virtually by definition. That

is not to say that qualitative (non-numerical) indicators are unimportant. Indeed by far the

majority of indicators we use on a day-by-day basis are qualitative – a sense of a street being

‘dirty’, of traffic being ‘heavy’ or of feeling unsafe walking in a particular neighborhood.

These ‘feelings’ are based on what we hear and see interpreted by what we have learned from

our own experience or from that of others. Quantitative indicators can have a feel of being

22

mechanical, technical and complicated, and this may be off-putting for some. Yet ironically

they are capturing the same sense of what we each do every day of our lives.

This thesis will explore indicators and indices in development by dissecting three

well-popularized examples. The examples have not been chosen because they are necessarily

the ‘best’ (whatever that may mean) but because they are widely reported

Admittedly there is over-simplification in these cause-effect assumptions. Corruption

is not the only limiting factor within good governance and neither is good governance the

only limitation to achieving human development. Similarly, an increase in environmental

degradation isn’t the only potential ‘cost’ to achieving good human development. But it can

at least be tentatively assumed a priority that the three indices could have a relationship. This

and their popularity make them good examples of their genre.

Human Development Index

The Human Development Index (HDI) is a creation of the United Nations

Development Programme and represents the practical embodiment of their vision of human

development as an alternative vision to what they perceive as the dominance of economic

indicators in development. Economic development had the gross domestic product (GDP) so

human development had to have the HDI. In essence the HDI represents a measure of the

‘quality of life’. Since its appearance in 1990 the HDI comprises three components:

1. Life expectancy (a proxy indicator for health care and living conditions).

2. Adult literacy combined with years of schooling or enrollment in primary, secondary

and tertiary education.

3 Real GDP/capita ($ PPP; a proxy indicator for disposable income).

The choice of these three components for the HDI is not surprising, and they can be

found in many lists of development indicators. It can certainly be argued that the selection of

23

only three components for human development is problematic. Income inequality, for

example, is not included alongside GDP/capita and neither are there any elements of

consumption. The UNDP have argued that these three can act as proxy indicators for many

others. For example, provision of a clean water supply and/or adequate nutrition would be

reflected in life expectancy. Indeed, given that the UNDP wanted an index that was relatively

transparent and simple to understand it is also not surprising that they decided to include only

three components.

As a key part of this strategy the UNDP decided to present the HDI within a country

‘league-table’ format and labels of ‘high’, ‘medium’ or ‘low’ human development applied by

UNDP depending upon each countries value for the HDI. Both these devices – league table

presentation and ‘labeling’ – promote a sense of ‘name and shame’ and comparison of

performance across peers.

Sadly, many African countries have low values for the HDI implying that the level of

human development for the continent is poor. Life expectancy is particularly poor in Africa

countries, a reflection of the preponderance of HIV/AIDS, while education is especially poor

in West Africa.

Corruption Perceptions Index (CPI)

It is often reiterated that one of the necessary drivers to bring about human

development is good governance, and controlling corruption is an important element of this.

The assumptions are straightforward. Corruption can result in resources being diverted from

the public good to private consumption with the result that impacts intended to be of wider

benefit are lost. Corruption may also drive up the costs of doing business with the result that

investment is deterred and national development will suffer. But the very nature of corruption

makes it difficult to gauge. After all, those benefiting from corruption are unlikely to say so

and openly declare how much they receive. Payers may be less reticent to talk about the

24

extent of corruption as they are one of the losers, but there may be a danger of them

exaggerating their problems and evidence may become somewhat anecdotal.

The Corruption Perceptions Index (CPI), created by the Berlin-based Transparency

International (TI; a non-governmental organization) and first released in 1995, has been

designed to provide a more systematic snapshot of corruption in the same way that the HDI

provides a snapshot of human development. Like the HDI it combines a number of different

‘indicators’ into one, but unlike the HDI the indicators which are combined all measure

corruption. Whereas the HDI has three quite different components (an heterogeneous index),

the CPI is an homogenous index in the sense that all the components upon which it is based

seek to measure the same thing.

Like the HDI, the CPI is based on data collected over a number of years prior to

release of the index. While the HDI 2006 is based on data from 2004 the CPI for 2006 uses

12 surveys and expert assessments from 2005 and 2006 with at least three of them being

required for a country to be included in the CPI. The surveys evaluate the extent of corruption

as perceived by country experts, non-residents and residents (not necessarily nationals) of the

countries included, and are:

• Country Policy and Institutional Assessment by the IDA and IBRD (World Bank), 2005

• Economist Intelligence Unit, 2006.

• Freedom House Nations in Transit, 2006.

• International Institute for Management Development, Lausanne, 2005 and 2006.

• Grey Area Dynamics Ratings by the Merchant International Group, 2006.

• Political and Economic Risk Consultancy, Hong Kong (2005 and 2006).

• United Nations Economic Commission for Africa, African Governance Report, 2005.

• World Economic Forum, 2005 and 2006.

• World Markets Research Centre, 2006.

25

. Environmental Sustainability Index (ESI)

It is possible that a country can derive a high HDI at the cost of environmental

degradation. It has indeed been shown that ‘development’, be it measured in terms of

economic wealth or more broadly in terms of quality of life, comes at a cost of environmental

quality. The third index discussed here is the Environmental Sustainability Index (ESI). The

ESI is backed by the powerful World Economic Forum (WEF) in collaboration with Yale and

Columbia Universities in the USA. This partnership refers to themselves as the ‘Global

Leaders of Tomorrow’, or simply ‘Global Leaders’. Values of the ESI have been published

for 1999 (pilot study), 2000, 2001, 2002 and 2005. Unlike the HDI and CPI the creators of

the ESI state that they see no need to publish the results on a yearly basis as there may be

little change to report.

The ESI methodology to arrive at a value for a country is somewhat complex (much

more so than that of the HDI) and as with the CPI the precise details do not need to be

repeated here. The 2005 version of the ESI covers 146 countries. The process begins with the

assimilation of raw data sets for 76 ‘environmental’ variables which are aggregated into 22

‘indicators’ and finally into the ESI. The terminology is admittedly somewhat confusing as

the ‘variables’ of the ESI are often reported as ‘indicators’ elsewhere in the literature. Thus

strictly speaking aggregation results in 22 indices (or sub-indices or partial-indices if

preferred) which are then combined into the ESI.

The data sets cover a diverse range of variables such as ambient pollution and

emissions of pollutants through to impacts on human health and being a signatory to

international agreements. Included amongst them are a measure of corruption (although not

the CPI) and measures which relate to human life span (e.g. child mortality rate) and

education (enrollment and completion rates) so there is some overlap with the HDI. Many of

the variables date from the year 2000 on, but some are based on earlier data. The ESI

26

variables are loosely grouped into the pressure-state-response (PSR) framework which has

proved to be popular for sustainability indicators. The variables are checked for their

distribution across all the nations but there is some tolerance of gaps. Gaps are filled by a

process of regression which predicts what the missing values would be based upon

associations with other variables.

2.1.2.2 Corporate Governance in capital Market Corporate governance refers to the system of administration of a company by its board and

managers, which engenders accountability to the benefit of the shareholders and the

customers. It involves regulation of the firm’s operation and defining the role and

relationships of each arm. By so doing, the firm is strengthened. The goals are also clearly

defined. On the other hand, capital market is a market in which long-term capital is raised by

corporate bodies, the government and local authorities. The money comes from private

investors, insurance companies, pension funds and bond. The origin of the Nigerian capital

Market dates back to the colonial era. The recognition of the role of capital in the production

process and economic performance of the nation led to the effective and efficient

combination of factors of production to ensure sustainable economic growth. To meet with

the growing financial need in the administration of the then fledgling nation, the colonial

masters decided to expand the frontiers of revenue generation. In the bid to make fund readily

available, it was necessary to establish a self-sustained financial system domiciled in Nigeria.

By the end of 1957, the colonial administration had promulgated the General Loan and Stock

Act and Local Loan (Registered Stock and Securities).

On March 19, 1996, the Federal Government of Nigeria appointed the panel on the

review of the Nigerian capital market – the Odife panel – which was billed with

responsibility to examine the state of the Nigerian capital market and formulate a framework

towards improving on the its achievement. Today it is believed that the development of the

27

Nigerian capital market can be catalyzed through good corporate governance. This will bring

out innovative vision, processes and structures to make decisions that will be beneficial to it

on long-term basis. Thierry Buchs said: “Good corporate governance is the glue that holds

together responsible business practices, which ensures positive workplace management

market place responsibility, environmental stewardship, community engagement and

sustained financial performance.” The application of the principle of corporate governance

will take the Nigerian capital market to a greater height. This will provide avenue for the

right and equitable treatment of shareholders. This principle of corporate governance will

provide practical guideline for best practices, including protection of shareholders, board,

investors and other stakeholders. The Nigerian capital market provides veritable avenue for

private enterprises to raise investible head start for the expansion and opening of businesses.

Entry of private firms into the market will continue to make a difference in terms of

economic development, which was why the stock market was deregulated many years back.

Though, the capital market, like other sector of national economy, has been beset with many

problems. These problems are both endogenous and exogenous. The exogenous challenges

resulted due to the external control of the market. Over the years, the stock market has been

seen as a pawn in the hands of politicians. This has affected the smooth operation of the stock

market, which is supposed to be insulated from the influence of politics. The endogenous

problems are those that are internally-induced in the market. But the challenges are amenable

to change with improved operational procedures including the adoption of information

technology through corporate governance.

2.1.2.3 Development and National Growth in Nigeria

A country is classified as developed when is able to provide qualitative life for her

citizenry. Nigeria in the last fifty years has been battling with the problems of development in

28

spite of huge human, material and natural resources in her possession. The paper discussed

the problems affecting national development as well as strategies for achieving sustainable

development in Nigeria. The paper adopted secondary data as sources of information. The

paper concluded that faithful implementation of development plan, commitment on the part

of the leaders and absence of corruption are required for the achievement of sustainable

development in Nigeria.

2.1.2.4 National Development in Nigeria

The pride of any government is the attainment of higher value level of development in such a

way that its citizens would derive natural attachment to governance. However, for a nation to

be in a phase of development there must be some pre-requisites, which include socio-political

and economic stability. The gap between the developed and the developing countries is not

static or narrow but is continually widening. A large majority of the world’s population in

developing world lives in a state of poverty. The problem of urban population, rural

stagnation, unemployment and growing inequalities continue to face less developed

countries, which Nigeria belongs. Hopes of accelerated development are difficult to realize.

This gloomy situation is of great concern to stake holders and the concerned citizenry.

Nigeria has not been able to engender meaningful development in spite of her huge resources

endowment. This has greatly affected her quest to improved quality of life of her citizens.

Poverty, unemployment and starvation still pervade the nook and cranny of the country.

Development is essential and critical to growth and sustenance of any country. In order to

successfully enhance meaningful development, effective strategies must be evolved. Here, we

examine the trend of national development in Nigeria, and provides a workable method of

approach to national development.

29

2.1.2.5 Development

According to Dudley Seers the challenges of any period depend on the tasks that face

those living in it. He believes we have misconceived the nature of the main challenge of the

second half of the twentieth century. This has been seen as achieving an increase in the

national incomes of the “developing” countries, formalized in the target of growth rates set

for the first development decades. Of course, we have all been aware that development

consists of much else besides economic growth. Sir Arthur Lewis made this point in the

opening pages of “The Theory of Economic Growth” in 1955, and the World Economic

Survey for 1968 emphasis’s it once more. Yet little more than lip service is paid to it; we are

still setting targets mainly or only for the national income.

It is now time to make the point more sharply. Surely we could hardly say that the

situation depicted by one set of projections was preferable to that shown by another set

simply because the former implied higher per capital incomes. After all, in what sense is

South Africa more developed than Ghana, or Kuwait than the U.A.R., or the United States

than Sweden?

Why do we concentrate on the national income in this way? It is of course convenient.

Politicians find a single comprehensive measure useful, especially one that is at least a year

out-of-date. Economists are provided with a variable which can be quantified and movements

in which can be analyzed, into changes in sectoral output, factor shares or categories of

expenditure, making model-building feasible. While it is very slipshod for us to confuse

development with economic development and economic development with economic growth,

it is nevertheless very understandable. We can after all fall back on the supposition that

increases in national income, if they are faster than the population growth, sooner or later

lead to the solution of social and political problems enough to feed a man, his income has

also to cover basic needs of clothing, footwear and shelter.

30

Another basic necessity, in the sense of something without which personality cannot

develop, is a job. This does not just mean employment; it can include studying, working on a

family farm or keeping house. But to play none of these accepted roles, i.e. to be chronically

unemployed, to be chronically dependent on another person’s productive capacity, even for

food, is incompatible with self-respect, especially for somebody who has been spending years

at school, perhaps at university, preparing for an active role.

It is true of course that both poverty and unemployment are associated in various

ways with per-capital income. If per-capita incomes are falling, absolute poverty can hardly

be reduced much, nor can unemployment (except in the very short run and exceptional

circumstances). But certainly increases in per-capita income are far from enough, as the

experience of petroleum economies show, to achieve either of these objectives. In fact, a rise

in per-capital income, as we very well know, can be accompanied by, can even cause,

growing unemployment.

Development as a concept is a victim of definitional pluralism. It is a difficult word to

define. However, attempts have been made by erudite scholars to conceptualize development.

Some of these definitions will be explored for the purpose of this study. Gboyega (2003)

captures development as an idea that embodies all attempts to improve the conditions of hu-

man existence in all ramifications. It implies improvement in material well being of all

citizens, not the most powerful and rich alone, in a sustainable way such that today’s

consumption does not imperil the future, it also demands that poverty and inequality of

access to the good things of life be removed or drastically reduced. It seeks to improve

personal physical security and livelihoods and expansion of life chances. Naomi (1995)

believes that development is usually taken to involve not only economic growth, but also

some notion of equitable distribution, provision of health care, education, housing and other

essential services all with a view to improving the individual and collective quality of life

31

(Naomi, 1995). Chrisman (1984) views development as a process of societal advancement,

where improvement in the well being of people are generated through strong partnerships

between all sectors, corporate bodies and other groups in the society. It is reasonable to know

that development is not only an economic exercise, but also involves both socio-economic

and political issues and pervades all aspects of societal life.

2.2 National Development Planning

National refers to a phenomenon that embraces a whole nation. National

development therefore can be described as the overall development or a collective socio-

economic, political as well as religious advancement of a country or nation. This is best

achieved through development planning, which can be described as the country’s collection

of strategies mapped out by the government.

2.2.1 National development plans in Nigeria

We have had series of development plans in Nigeria. Nigeria is permanently hunted

by the spectra of development. Its forty-nine years of independence actually are rolling by

daily in search of development. The myth of growth and development is so entrenched that

the country’s history passes for the history of development strategies and growth models

from colonial times up to date. No term has been in constant flux as development. This seems

the only country where virtually all notions and models of development have been

experimented

(Aremu, 2003). Two years after independence, the first National Development Plan

policy was formulated between 1962 and 1968 with the objectives of development

opportunities in health, education and employment and improving access to these

opportunities, etc. This plan failed because fifty percent of resources needed to finance the

plan was to come from external sources, and only fourteen percent of the external finance

32

was received (Ogwumike, 1995). Collapse of the first Republic and the commencement of

civil war also disrupted the plan. After the civil war in 1970, the second national development

plan 1970 to 1974 was launched, the plan priorities were in agriculture, industry, transport,

manpower, defense, electricity, communication and water supply and provision of social

services (Ogwumike, 1995). The third plan, covering the period of 1975 to 1980 was

considered more ambitious than the second plan. Emphasis was placed on rural development

and efforts to revamp agricultural sector. The fourth plan 1981 to 1985 recognized the role of

social services, health services, etc. The plan was aimed at bringing about improvement in the

living conditions of the people. The specific objectives were: an increase in the real income

of the average citizen, more even distribution of income among individuals and socio-

economic groups, increased dependence on the country’s material and human resources, a

reduction in the level of unemployment and underemployment (Ogwumike, 1995). During

these periods, Nigeria’s enormous oil wealth was not invested to build a viable industrial base

for the country and for launching an agrarian revolution to liquidate mass poverty. For

instance, the Green Revolution Programme that replaced Operation Feed the Nation failed to

generate enough food for the masses. In the recent past, various strategies for development

have also been tried with little or no result; among these were the structural adjustment

programme (SAP), Vision 2010, national economic empowerment and development

strategy (NEEDS), creation of development centers, etc. currently, seven point agenda of the

present administration with vision 2020 without any clear methodological approach towards

achieving them. It is obvious that the current results so far are not what development

connotes.

33

2.2.2 Problems of National Development in Nigeria

In spite of series of development strategies, put in place by successive governments,

and sometimes with good intentions, all attempts to generate meaningful development proved

futile. Based on this, one is now confronted with these puzzles: “Were those previous

development plans or strategies bad in their context, or wrongly projected?” If nothing was

wrong with the plans, then why is it still difficult to generate meaningful development in spite

of the huge resources at our disposal? The solutions to these puzzles are not far fetched. A lot

of factors have combined together to fetter nation’s development. One, there are in most

cases, no executive capacity responsible for the formulation and implementation of a position

but without any meaningful executive authority. Some of the previous development plans

failed because; there was little or no consultation of the general public. Planning is

supposed to involve even the peasants in the villages. Even, the Local Government

officials who are close to the people were not consulted. Planning is not an edifice where

technocrats alone operate (Mimiko, 1998). Lack of good governance also militates against

national development. Where there is no good governance, development becomes a mirage.

This is as a result of bad leadership in the country. Most of our leaders have no sense of

commitment to development. Mimiko (1998) captures the situation this way: “The

decolonization allowed the crop of leaders that aligned with colonial power to take over

Nigeria. This ensured the sustenance of a neo-colonial economy even after political

independence. These leaders on assumption of power quickly turned up the repressive

machinery of the colonial state rather than dismantling it. Significantly, they have no vision

of development to accompany the efficient instrument of repression they inherited. All they

were interested in was access to power and privileges and not development”. High level of

corruption and indiscipline is another barrier to development. Nigeria state is corrupt,

managed by corrupt leaders who have made the state an instrument of capital accumulation,

34

rather than using it to project the interest of the citizenry. A very good plan supervised by a

thoroughly corrupt state can hardly do a thorough good job (Mimiko, 1998). Corruption and

development are antithetical to each other, the two cannot cohabit, and so, where one is

present, the other suffers. Another important factor is the mono-economic base of the

country. The country largely depends on crude oil for her survival to the detriment of other

resources. All other sectors of the economy are neglected. For instance, agriculture, which

constitutes the mainstay of the Nigerian economy in the 1950s and 1960s, has been thrown

into limbo over the years. How would government encourage export promotion when there is

virtually nothing to export? The economy is not diversified and this is not suitable for a

sustainable development (Mimiko, 1998).

2.2.3 Models of Development: Asia in Context

The enviable growth and development patterns of several Asian countries are well known.

East Asia is the only region in the world that has been able to maintain strong, consistent

growth patterns over several decades, led first by Japan and the newly industrializing

economies of Hong Kong, South Korea, Singapore and Taiwan, etc (Mimiko, 1998;

Adelman, 1995). Apart from the homogenous nature of these societies, other several factors

were responsible for their development. These were: development of agricultural sector, a

system of mass education, development of indigenous industries, export-oriented strategy, the

Spartan discipline of their leadership, existence of efficient bureaucracy, Encouragement of a

dynamic private sector working in co-operation with the government towards a society-wide

vision of development, institutional capacity building and attention to the problems of

governance, consistency and policy stability, etc (Mimiko, 1998).

35

2.2.4 Strategies for national development

The beauty of any development plan is the faithful implementation of such plan,

which its success lies with the implementers. In our previous discussion, it was mentioned

that most of the past development plans failed as a result of implementation problem and lack

of committed leadership etc. Based on this fact, new development policies and strategies are

currently in place as alternative strategies for development, such as Seven Points Agenda,

Vision 2020, etc. These policies and vision appear to be all embracing but they are not

sacrosanct in their totality. But if faithfully implemented, the nation at least will move

towards path of development. It is in our opinion that to successfully implement the

Seven Point Agenda of the present regime, there some lessons we can learn from Asian

models of development.

First, development requires total commitment on the parts of the leadership. The need

for discipline and honesty on the part of the project implementers cannot be compromised;

such officials should show enough discipline, interest, willingness, dedication and honesty.

Without these attributes and the will to pursue set economic goals, all other ingredients of

development present would amount to nullity. Second, this country should learn that

wholesale liberalization; the type advocated by the apologists of orthodox SAP is not

necessarily synonymous with development. It goes without saying therefore that a level of

state involvement (heterodoxy) is imperative even in the face of the crucial need for structural

adjustment. But whatever the degree of state involvement, private ownership of properties

must be guaranteed for investment to get stimulated (Mimiko, 1997). Although, it is another

question whether Nigerian state as presently constituted can play this critical role given its

embarrassing level of corruption, inefficiency and incapacitation by commitment to sundry

primordial values. Be it as it may, the goal should be to evolve a process of reformation of the

state to make it able to play the type of highly constructive role that its counterparts are

36

playing in the whole of East Asia (Mimiko, 1997). Also, stability and continuity of policies

encourage investment and propel development. For instance, in Korea, when park was

assassinated, his policies remained and were building on. Nigeria leadership must learn to

build on policies rather than to jettison them for new ones for the sake of party politics and

personal aggrandizement. There is the need for Nigeria to revamp the agricultural sector;

this sector was instrumental in the development of Japan. Agriculture used to be the mainstay

of Nigeria economy but the discovery of crude oil succeeded in putting agriculture into state

of oblivion. Human resources development is also a sine qua non to Nigeria national

development; this was demonstrated in Japan and Korea (Lawal et al., 1976). Development

depends very much on human knowledge and skills. This must be such that a high quality of

education and training is achieved for a large majority at a reasonable price and the context

and quality of such education and training should be relevant and adequate to the country’s

development needs. Literature on development stresses the axiom that it is the people who

develop and that unless there are large numbers of suitably qualified people, development

cannot take place.

There is need for attitudinal change. Nigerians must as a matter of fact change their

pessimistic attitude towards development. The idea or belief that “things cannot work in

Nigeria or Nigerian factor” should be discouraged. Real development is achieved through

internal activities rather than from external influences. Development is seen as a process

generated within a society by forces propagated and invigorated by the actual members of

that society. It is believed that true development can neither be started nor sustained by

outsiders. Although, no country can develop in isolation, but heavy emphasis should not be

placed on foreign resources for the country’s development. The models of development of

Japan and China show how these countries utilize their internal resources both human and

material for rapid economic development. It is reasonable that Nigerians should inculcate a

37

high sense of patriotism as demonstrated by the Japanese and Chinese. Importantly,

citizenship should be promoted over indignity in order to achieve cooperation and

participation of all communities in the development process. Omotoso (2008) noted that the

1999 constitution is directly or indirectly promoting indignity in the country. For example,

section 318(1) of paragraph (IV) supports indignity. The constitution sets parameters for

indigenes and non-indigenes. It equally gives legal bases to various discriminatory policies

that actively promote indignity, contrary to some sections that argue against discrimination.

This is very contradictory. Leadership in Nigeria must behave in a way to inculcate the spirit

of patriotism in the minds of the people, so that they will be ready to stand with the

government in her development efforts. When Nigerians see themselves as one and not as

belonging to one section of the country as portrayed presently, the urge to develop Nigeria

will be germinated and sustained. Additionally, the need to reform electoral process is

imperative for socio-economic and political development. Electoral fraud is one of the

banes of Nigeria’s development. The role of leadership in development cannot be

overemphasized, all efforts towards development must be coordinated and directed by the

leaders, therefore, the leaders must be development conscious, have genuine interest for

development and the political will to propel such development. The leaders must also have

the cooperation of the people, because, it is the people that develop a nation. Honestly, the

aforementioned ingredients cannot be possible without a legitimized mandate for the leaders

by the people. When a leader assumes office illegitimately or through electoral fraud, such

leader is bound to fail in his effort to generate meaningful development. This is due to the

fact that such illegitimate leaders tend to display characters that repress development such as;

selfishness, corruption, pride, thuggery and inefficiency and also, there is apathy and natural

detachment to development plans by the people as they did not see such emerging leaders as

the products of their consent through voting. Based on the foregoing, the electoral process

38

should be reformed in such a way that nobody assumes power (political) through crook or

fraudulent means. The process should be made opened, free, fair and competitive. All legal

battles preceding the elections must be concluded before any swearing in. This, it is believed,

will create genuine environment conducive for development. Lastly, development plan

should not be exclusively regarded as economic issue it should be seen as holistic and

encompassing national issue that cuts across economic, social, political and psychological

aspects of human endeavor.

2.3 Capital Market

The Nigerian Security Exchange (NSE) was established in 1960 and commenced

trading in 1961. All share indexes was launched in 1984. The Central Security and Clearing

System (CSCS) were introduced in 1997. The automation of the trading system (ATS) was

launched in 1999. The exchange commenced T+3 trading cycle in 2000. The capital market

products include the following: Equity with about 202 companies; Bonds with corporate 45,

Local Government, State Government 5, and Federal Government 38.

Equity

Two hundred and two companies listed on the daily official list with companies

cutting across the various sectors of the economy. This is referring to as two-Tier market.

Admission of companies to the daily official list of the exchange is preceded by the

fulfillment of the NSE listing requirements. Trading is automated, clearing and settlement

cycle is T+3.

39

Table 2.1: Market Indices

2002 2003 2004 2005 2O06

MKT CAP N763.9b N 1.356 tr N2.112tr N2.9tr N5.12tr

INDEX 12,137.72 20,128,94 23,844.45 24,085.76 33,189

Turnover VOL 6.6b 13.30b 19.21b 26.7b 36.7b shares

Turnover VAL N60.3b N120.7b N225.82b 262.9b N470.25b

Av Daily VOL 26.4m 53.02m 75.03m 107.6m 150.9m shares

AV Daily VAL N237.2m N474.79m N882.1m N1.06b N1.94b

LISTED COYS 195 200 207 214 202

Listed Securities 258 265 276 285 288

Source: Money Market Association of Nigeria

Bonds

Regular issuance of bonds existed by the three tiers of government (local, state and

federal) in the 1960s, 70s and 80s. There was a lull in the 1990s. In 2006, the Debt

management Office DMO, an arm of the Ministry of Finance MOF reintroduced the regular

issuance of Federal Government of Nigeria Bonds (quarterly calendar) and the primary dealer

(market makers (15) were licensed to deal in the bonds. Traders in FGN bonds began in July

2006. Over 50% of all FGN bonds are held by foreign investors.

The Stock Exchange now have listed companies such as banks, and insurance

companies on a more robust footing and operating in a more professional environment. The

need for the newly capitalized banks to provide improved returns to their shareholders has

meant that these institutions now have to become creative in their product offering as well.

40

2.3.1 National Development and Growth in Nigeria

Development is critical and essential to the sustenance and growth of any nation. A

country is classified as developed when is able to provide qualitative life for her citizenry.

Nigeria in the last fifty years has been battling with the problems of development in spite of

huge human, material and natural resources in her possession. Problems affecting national

development as well as strategies for achieving sustainable development in Nigeria have ever

remained a central focus of our national life. We concluded that faithful implementation of

development plan, commitment of the part of the leaders and absence of corruption are

required for the achievement of sustainable development in Nigeria.

We have had series of development plans in Nigeria. Nigeria is permanently hunted

by the specter of development. Its fifty-two years of independence actually are rolling by

daily in search of development. The myth of growth and development is so far entrenched

that the country’s history passes for the history of development strategies and growth models

from colonial times up to date. No term has been in constant flux as development. This seems

the only country where virtually all notions and models of development have been

experimented (Aremu 2003)

Two years after independence, the first National Development Plan policy was

formulated between 1962 and 1968 with objectives of development opportunities in health,

education and employment and improving access to these opportunities, etc. this plan failed

because fifty percent of resources needed to finance the plan was to come from external

sources, and only fourteen percent of external finance was received (Ogwumike, 1995). After

the civil war in 1970, the second national development plan 1970 to 1974 was launched, the

plan, the plan priorities were in agriculture, industry, transport, manpower, defense,

electricity, communication and water supply and provision of social services (Ogwumike,

1995). The third plan, covering the period of 1975 to 1980 was considered more ambitious

41

than the second plan. Emphasis was placed on rural development and efforts to revamp

agricultural sectors. The fourth plan 1980 to 1985 recognized the role of social services,

health services, etc. the plan was aimed at bringing about improvement in the living

conditions of the people. The specific objectives were: an increase in the real income of the

average citizen, more even distribution of groups, increased dependence on the country’s

material and human resources, a reduction in the level of unemployment and

underdevelopment (Ogumike, 1995).

During these periods, Nigeria’s enormous oil wealth was not invested to build a viable

industrial base for the country and for launching an agrarian revolution to liquidate mass

poverty. For instance, the Green Revolution Program that replaced Operation Feed the Nation

failed to generate enough food for the masses. In the recent past, various strategies for

development have also been tried with little or no result; among these were the structural

adjustment program (SAP), vision 2010, national economic empowerment and development

strategy (NEEDS), creation of development centers, etc. currently, the transformation agenda

of the present administration with vision 2020 without any clear methodological approach

towards achieving them. It is obvious that the current results so far are not what development

connotes.

2.3.2 Development and Administration of the Nigeria Capital Market.

Administrative Structure of the Nigerian Capital Market

The Nigerian Stock Exchange

The Nigerian Stock Exchange (NSE) was established in 1960 as the Lagos Stock

Exchange. As of December 31, 2012, it has about 198 listed companies with a total market

capitalization of about N8.9 trillion ($57 billion). The Nigerian Stock Exchange was founded

in 1960 as the Lagos Stock Exchange. It started operations in Lagos in 1961 with 19

42

securities listed for trading. In December 1977 it became known as The Nigerian Stock

Exchange, with branches established in some of the major commercial cities of the country.

The NSE continues to evolve to meet the needs of its valued customers, and to achieve the

highest level of competitiveness. With about 200 companies and 258 Securities listed, The

Exchange operates fair, orderly and transparent markets that bring together the best of

African enterprises and the local and global investor communities. The Nigerian Stock

Exchange is poised to champion the acceleration of Africa's economic development and to

become “the Gateway to African Markets”.

Operation

The NSE is regulated by the Securities and Exchange Commission, which has the

mandate of Surveillance over the exchange to forestall breaches of market rules and to deter

and detect unfair manipulations and trading practices. The Exchange has an automated

trading System Data on listed companies' performances are published daily, weekly, monthly,

quarterly and annually.

The Nigerian Stock Exchange has been operating an Automated Trading System

(ATS) since April 27, 1999, with dealers trading through a network of computers connected

to a server. The ATS has facility for remote trading and surveillance. Consequently, many of

our dealing members trade online from their offices in Lagos and from all the thirteen

branches across the country. The Exchange is in the process of establishing more branches

for online real time trading. Trading on The Exchange starts at 9.30 a.m. every business day

and closes at 2.30 p.m.

In order to encourage foreign investment into Nigeria, the government has abolished

legislation preventing the flow of foreign capital into the country. This has allowed foreign

brokers to enlist as dealers on the Nigerian Stock Exchange, and investors of any nationality

43

are free to invest. Nigerian companies are also allowed multiple and cross border listings on

foreign markets.

Pricing

The Nigerian Capital Market was deregulated in 1993. Consequently, prices of new

issues are determined by issuing houses and stockbrokers, while on the secondary market

prices are made by stockbrokers only. The market/quote prices, along with the All-Share

Index plus NSE 30 and Sector Indices, are published daily in The Stock Exchange Daily

Official List, The Nigerian Stock Exchange CAPNET (an intranet facility), our website

(http://www.nse.com.ng), newspapers, and on the stock market page of the Reuters Electronic

Contributor System. Our on-line code in the Reuters Network is NSXA-B.

Regulation

The NSE is regulated by the Securities and Exchange Commission, which has the

mandate of Surveillance over the exchange to forestall breaches of market rules and to deter

and detect unfair manipulations and trading practices.[3] The exchange has an automated

trading System. Data on listed companies' performances are published daily, weekly,

monthly, quarterly and annually.

Transactions on The Exchange are regulated by The Nigerian Stock Exchange, as a

self-regulatory organization (SRO), and the Securities & Exchange Commission (SEC) –

apex regulator, which administers the Investments & Securities Act of 1999.

The All-Share Index

The Exchange maintains an All-Share Index formulated in January 1984 (January 3,

1984 = 100). Only common stocks (ordinary shares) are included in the computation of the

44

index. The index is value-weighted and is computed daily. The highest value of 66,371.20

was recorded on March 3, 2008. Also, The Exchange has introduced the NSE-30 Index,

which is a sample-based capitalization-weighted index plus four sectorial indices. Similarly,

four sectorial indices have been introduced to complement existing indices. These are NSE-

Food/Beverages Index, (Later renamed NSE – Consumer Goods Index) NSE Banking Index,

NSE Insurance Index and NSE Oil/Gas Index.

Associations

The Nigerian Exchange is an affiliate member of the World Federation of Exchanges (FIBV).

It is also an observer at meetings of International Organization of Securities Commissions

(IOSCO), and a foundation member of the African Stock Exchanges Association (ASEA).

The NSE is regulated by the Securities and Exchange Commission, which has the mandate of

Surveillance over the exchange to forestall breaches of market rules and to deter and detect

unfair manipulations and trading practices.[3] The exchange has an automated trading

System. Data on listed companies' performances are published daily, weekly, monthly,

quarterly and annually.

Council

The National Council is the governing body of The Nigerian Stock Exchange. Currently, the

National Council has of eighteen members: eleven individual ordinary members and seven

dealing members. The National Council directs The Nigerian Stock Exchange's business and

financial affairs, strategy, structures and policies; monitors the exercise of any delegated

authority; and deals with challenges and issues relating to corporate governance, corporate

social responsibility and corporate ethics. The new council members of The NSE are

45

Alhaji Aliko Dangote, GCON - President

Mr. Oscar Onyema - Chief Executive Officer

Mr. Aigboje Aig-Imoukhuede - Ordinary Member

Mr. Abubakar Mahmoud, SAN - Ordinary Member

Mr. Abimbola Ogunbanjo - Ordinary Member

Mrs. Yemisi Ayeni - Institutional Member

Partnership Investment Company Limited (Represented by Mr. Victor Ogiemwonyi) - Dealing Member

Reward Investment and Services Limited (Represented by Mr. Henry Olayemi) - Dealing Member

WSTC Financial Services Limited (Represented by Mr. Tofarati Agusto) - Dealing Member

APT Securities and Funds Limited (Represented by Alhaji Garba Kurfi) - Dealing Member

City-Code Trust & Investment Limited (Represented by Mr Ebilate Mac-Yoroki) - Dealing Member

ICON Stockbrokers Limited (Represented by Mr. Chike Nwanze) - Dealing Member

Stanbic IBTC Stockbrokers Limited (Represented by Mr. Oladele Sotubo) - Dealing Membe

The Security and Exchange Commission

The security and exchange commission is structured into the following:

Legal

The new Legal Dept. serves as the legal advisory arm of the Commission and it reports to the

Commissioner (Legal & Enforcement). The Dept. coordinates all matters having legal

content including legal publications, rule making and litigations involving the Commission.

Functions of Legal Department

Provision of legal advice on all matters in which the Commission has interest.

Provision of legal advice on rule making, interpretation of securities laws and other relevant

46

laws affecting the capital market. Making inputs into legislation affecting the capital market

and the economy in general. Drafting the Rules and Regulations of the Commission.

Drafting/vetting of all agreements in which the Commission is a party or an interested party.

Co-ordination of all matters having legal content, including legal publications of the

Commission. Advising the Commission on all litigations involving it including appointment

of external Solicitors and the coordination and monitoring of all litigations involving the

Commission.

Financial Services & Corporate Governance

The department is responsible for rendering accounting and auditing advisory

services, the detailed analysis of audited financial statements and periodic reports of public

companies and monitoring and ensuring compliance with the Code of Corporate Governance

2011.

The department is made up of two divisions: The Financial Services Division and The

Disclosure and Compliance Division

Functions

Advises the Commission on Accounting and Auditing matters arising from the

Implementation of the Investment and Securities Act. Analyses Financial Statements of

Public companies with a view to assessing their financial health and compliance with SEC

Disclosure requirements and applicable accounting standards (SAS, GAAP & IFRS). Monitor

compliance by public companies of the Code of Corporate Governance to promote best

practice. Liaise with accounting and auditing standards setting bodies, regarding the

promulgation of new or review of accounting and auditing standards (eg Nigerian Accounting

Standards Board). Liaise with the Nigerian Accounting Standards Board (NASB), Institute of

47

Chartered Accountants (ICAN), World Bank and other relevant bodies in monitoring the

activities of external auditors of quoted companies. Provide Financial Services to other

departments within the Commission eg SIS, CIS, RRIE etc. Represents the Commission on

the Board of Institute of Directors (IOD), the Committee of Nigerian Accounting Standards

Board (NASB) and on the Committee of FRSCC and FSS 2020

Monitoring & Investigation

The overall responsibility of the Monitoring and Investigation Department involves

identifying, assessing and monitoring the operations and risks of registered operators and

protection of investors. It is a legal requirement that every operator in the market must be

certified as fit and proper to carry out or undertake capital market functions. The Department

is comprised of two divisions: Monitoring and Investigation

Monitoring Division

Functions

Ensure that market operators maintain healthy financial states. Ensure that Market

participants comply with the Laws/Rules and Regulations guiding the conduct of their

respective operations. Ensure compliance with the provision of the Anti-money laundering

prohibition Act (2004). The Division utilizes the on-site and off-site inspections to achieve

these stated objectives.

Investigation Division

Functions

Resolution of disputes arising from capital market transactions involving CMOs and

investors or among CMOs. Investigation of reported and suspected infractions in the market.

The division uses both off-site and on-site reviews to achieve its stated objectives.

48

Registration & Recognized Investment Exchanges. The Registration and Recognized

Investment Exchanges Department registers market operators and regulates the stock,

commodity, futures and options Exchanges. The Department is made up of four (4)

Divisions: Fresh registration division, Registration renewal division, The Stock Exchange

division and Commodity and futures exchange division

Fresh Registration Division

Functions

Processes applications for all prospective registrants (Self-Regulatory Organizations, Capital

Market Operators, and Capital Market Consultants). Gives legal opinions to market operators.

Reviews and vets all legal documents submitted by prospective registrants

Registration Renewal Division

Functions

Reviews applications for registration renewal, Renewal with Additional

Functions/Individuals Reviews. Renewal with additional functions. Renewal with additional

sponsored individuals. All amendments of functions/sponsored individuals, etc

The Stock Exchange Division

Functions

Collects SEC fees on purchase transactions on the Exchange. Reconciles monthly SEC fees

receipt. Recovers underpayments and late payments

Commodity and Futures Exchange Division

Research & Planning

The department derives its functions from section 8(e) (p) (t) of the ISA No. 29 of 2007. Its

main functions include among others; Provision of timely, efficient and accurate information

49

to enhance the work of the Commission. Coordination of the Commission’s investor

education programs. Development of new products and processes. Coordination of the

Commission’s International Relations. Developing and monitoring the implementation of the

Commission’s Strategic Plans as well as ensuring compliance with the SERVICOM Charter

Evaluation of capital market risks. Serving as the “Think Tank” of the Commission

Provision of efficient Library services. To achieve the above objectives the Department is

currently made up of seven (7) Divisions namely; International Relations (IR), Library and

Information Services (L& IS), Market Development and Publications (MD&P), New

Products (NP), Office of the Chief Economist and Research (OCE&R), Planning and

SERVICOM (P&S), Risk Assessment (RA)

International Relations (IR)

Manages relationships with international capital market Organizations and regulators

Initiates relationship with regulators through the use of Memorandum of Understanding

(MOU), Publishes periodical on International issues. Manages the Secretariat of the IOSCO

Africa/Middle East Regional Committee. Reviews relevant international publications and

events. Responds to int’l enquiries on the Commission's activities and the Nigerian Capital

Market. Makes enquiries on behalf of the Commission to international institutions and other

regulators

Library and Information Services (L&IS)

Acquisition of various library materials, Cataloguing and classification of materials,

Circulation of materials to users, liaising with other Libraries for information sharing

Indexing and abstracting periodical articles.

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Market Development and Publications (MD&P)

Organizes conferences, seminars, workshops, public enlightenment programmes,

shareholder forums, and participates in exhibitions and trade fairs, Production and sales of

periodicals and pamphlets, Preparation of speeches and Promotion of capital market

education in Nigeria

Maintenance of enquiry/enlightenment desk, management and supervision of quiz

competitions/essay writing and excursions

New Products (NP)

Conducts research into any aspect of the Securities industry with a view to identifying

and developing new products that will deepen the market, Liaises with other organizations

on matters relating to new product development

Promotes investor education and training on new products in collaboration with Market

Development & Publication Division, NCMI and any other external bodies in this respect

Office of the Chief Economist and Research (OCE&R)

Reviews the national budget and other economic policies as they affect the capital market

Prepares Monthly, Quarterly and Annual Reports on the activities of the Commission and the

market for Ministerial briefings, Prepares papers to be presented at various forums for the

executive management team. Reviews relevant capital market issues in the media

Serves as Secretariat for the Capital Market Committee (CMC) Collates data and statistics on

the capital market and the economy, Maintains Databank on the Nigerian Capital Market

Publishes Monthly capital market Bulletin, Conducts Research or study/surveys on capital

market issues

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Planning and SERVICOM (P&S)

Identifies, formulates and monitors implementation of short and long term plans of the

Commission, Serves as Secretariat for Management meetings and retreats, Disseminates best

practices and other tips on service delivery improvement within the Commission, Ensures

understanding and application of SERVICOM Index in the performance of functions

assigned to SEC by the ISA 2007

Risk Assessment (RA)

Assesses risks for the Commission and on behalf of the capital market operators, coordinates

and analyzes risk inputs from the capital market operators and institutions, Monitors risk

management in the Nigerian capital market, Advises management on contemporary trends in

risk management

Securities Investment Services

The department regulates securities offered to the public and all forms of business

combinations. It monitors the activities of all publicly quoted companies and notes

transactions involving private companies with foreign interest. The Department consists of

four Divisions: Investment, Legal, Business Combinations and Acquisitions & Takeovers

Investment

The division is sub-divided into two units:

Disclosure

Vets offer documents to ensure full disclosure of all material facts. Registers securities of

public companies issued by way of public offers, rights issues, private placements, bonus

issues and existing securities, Processes applications for conversion of preference shares or

stocks to equity. Attends Completion Board Meetings to ensure proper conduct at the

meeting, Makes input on rules regarding regulation of securities.

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Continuous Assessment

Reviews proposed basis of allotment for public offers, rights issues and private placements to

ensure compliance with regulatory requirements. Maintains registers of foreign portfolio and

foreign direct investments, Computes penalties for late submission of proposed basis of

allotment, Reviews post allotment compliance reports to ensure compliance with the

Commission's Rules and Regulations, and Recommends amendments to rules regarding

allotment of shares.

Legal

Reviews and vets offer documents, Gives legal opinion on documents submitted by Issuers

and/or Issuing Houses.

Business Combination

Reviews fresh merger applications, Promotes best practices in Mergers and Acquisitions in

Nigeria, Makes inputs into rules relating to Mergers & Acquisitions

Acquisitions and Takeovers

Reviews and processes applications for acquisitions, takeovers, and management buyout,

Maintains records of share-holders with interest of 5% and above in any quoted company

Monitors and investigates market activities that are likely to give rise to mergers, acquisitions

or takeovers. Investigates cases of business combinations which have not been cleared by the

Commission, Conducts post approval inspections to ensure compliance with the terms of

approval

Collective Investment Services

The Collective Investments Services (CIS) Department is responsible for developing and

deepening the market in relation to Collective Investment Schemes on one hand and

protecting investors on the other. The department comprises two divisions: Unit Trust

Division and Venture Capital Division.

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Unit Trust Division

Functions

Registration /Authorization of Unit Trust Schemes (UTS), Registration /Authorization of

Real Estate Investment Trust (EIT), Ensuring effective oversight of the schemes above.

Proposing /drafting rules on new CIS product. There are forty two (42) registered/approved

Unit Trust Schemes (UTS) in operation in Nigeria which comprises thirty nine (39) Open

Ended Funds and three (3) Close Ended Funds, under the following investment categories:

22 Equity Based Funds, 2 Money Market Funds, 4 Bond Funds (Fixed Income), 3 Ethical

Funds, 9 Mixed/Balanced Funds, 2 Real Estate Investment Trust Schemes

Venture Capital Division

The Venture Capital Division is primarily charged with the responsibility of registering and

monitoring the activities of Venture Capital Fund Managers as well as fostering the

development of this sub-sector of the Nigerian Economy.

Functions

� Developing and Regulating the Venture Capital Industry in Nigeria

� Inspecting and monitoring the activities of Venture Capital Companies and Managers

� Collection, collation and analysis of the returns of Venture Capital Managers

� Collate data on the activities of the Venture Capital Industry for government’s

economic planning and development purposes.

� Ensure that the 10% of PBT set aside by Banks for Small and Medium Industry

Equity Schemes (SMIES) are disbursed to the Fund Manager

� Collate data on the numbers of SMEs that such Fund has been disbursed to and the

various sectors of the economy in which they operate

� Ensure steady growth of the Venture Capital Industry

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Coordinator Zonal Offices Objectives

To ensure effective, efficient and smooth operations at zonal offices level for the creation of

Capital market awareness and participation among the widest spectrum of the population

FUNCTIONS OF ZONAL OFFICES CO-ORDINATION DEPARTMENT

To be a one-stop department for the handling and process follow-up of all matters that comes

in from Zonal Offices for attention at the head office or goes out from the head office for

attention at zonal offices. Monitoring the performance of zonal offices in the implementation

of programmes and budgets drawn-up within Commission's policy frame work and approved

by the management. Evaluating those performances to determine whether or not targets and

intended impacts are being achieved. Setting (and from time to time reviewing) performance

indicators to be used in the assessment of the impact of the activities of the zonal offices in

their zones. Keeping adequate and up-to-date information on all aspects of zonal offices

operations including:

*Infrastructural facilities, Staffing levels and structure

* Number and type of recognized exchanges operating in each zone.

* Number and type of capital market operators operating in each zone.

* Levels of capital market activities carried out/being carried out in each zone.

* The number of persons investing through the capital market showing the nature and volume

of their investment as well as the corporations which they are held.

* Governments (State and Local), corporate Institutions (private and government) that have

raised funds through the capital market showing purposes for which the funds were raised

together with comments on the success or other of the deployment of the funds.

Ensuring that zonal offices are adequately informed of all policy matters that affect their

conducts and following up to ensure compliance.

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Promoting all matters, positions or proposals that can enhance the efficiency and

effectiveness of zonal offices in the discharge of their responsibilities.

Preparing and submitting to the management periodic (monthly) report on the performance of

each zonal office including the evaluation of achievements so far against set targets, noting

areas of failures and those of outstanding performance and making recommendations on how

to solve the problems responsible for failures and sustain or improve on good performance.

Ensuring cordial and mutually re-enforcing relationships among zonal offices as well as

between them and various departments in the headquarter. To, from time to time initiate

recommendations to the management on matters affecting Commission's activities in the

zones especially on how to enhance the efficiency and effectiveness of zonal offices.

To report on any new development or unique situation in the zones needing special

intervention by the head office and to recommend to the management the type and nature of

the intervention required. Any other responsibilities that may be assigned by the

management from time to time

Enforcement & Compliance Department

The Department is responsible for ensuring compliance with regulations by operators and

imposing sanctions where infractions are established. The department analyses unresolved

complaints and recommends appropriate actions to Management with the ultimate aim of

protecting investors. The Department comprises three divisions: Administrative Proceedings,

Enforcement and Compliance

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Administrative Proceedings Division

Functions

Serves as secretariat for the Commission’s Administrative Proceedings Committee

Reviews violations of securities laws, rules and regulations pursuant to the Investments and

Securities Act (ISA) 2007 and recommends appropriate sanctions to the Committee

Enforcement Division

Functions

Addresses unresolved cases referred from operational Departments. Refers criminal

violations to law enforcement agencies for further investigation. Initiates Enforcement

actions against erring Capital Market Operators

Compliance Division

Functions

Monitors and ensures compliance by any operator/company or individuals sanctioned,

directed to do or to refrain from doing an act by the Commission. On-site inspection of

offices and books of operators. Information sharing with respect to compliance issues. Liaises

with other operational Departments to ensure that registered operators comply with the filing

of statutory returns/reports with the Commission

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Source: SEC Organogram

The investments and securities act, 2007 provide that there is established a body to be known as

the Securities and Exchange Commission. The Commission shall be a body corporate with

perpetual succession and a common seal and may sue and be sued in its corporate name. The

Commission shall have power to acquire, hold or dispose of any property, movable or

immovable for the purpose of carrying out any of its functions under this Act. The

Commission shall have its head office in a location which is by law designated as the Capital

of the Federal Republic of Nigeria and may establish zonal offices in any part of Nigeria in

accordance with the decision of the Board of the Commission. There shall be for the

Commission a Board which shall consist of- a part-time Chairman; the Director-General and

58

Chief executive as Accounting officer; three full time Commissioners; a representative of

the Federal Ministry of Finance; a representative of the Central Bank of Nigeria; and two

part-time Commissioners one of whom shall be a legal practitioner qualified to practice in

Nigeria with ten years post call experience. A person shall not be qualified for appointment

to the Board of the Commission unless he is a fit and proper person and- in the case of the

Chairman or Director-General of the Commission, he is a holder of a university degree or its

equivalent with not less than 15 years cognate experience in capital market operations; in

the case of any other member other than an ex-officio member, he is a holder of a university

degree or its equivalent with not less than 12 years cognate experience in capital market

operations or legal practice as the case may be; and in the case of an ex-officio member, he is

not below the rank of a director in the Ministry or Central Bank of Nigeria, as the case may

be. The Board shall be responsible for the general administration of the Commission and, in

particular, shall- formulate general policies for the regulation and development of the capital

market and the achievement and exercise of the functions of the Commission; approve the

audited and management accounts of the Commission; appoint Auditors for the Commission;

consider and approve the annual budget of the Commission as may be presented to it by the

management; establish zonal offices of the Commission; and carry out such other activities

as are necessary and expedient for the purposes of achieving the objectives of the

Commission. The Board shall, on the recommendation of the Director-General, approve the

duties of the full time Commissioners. The Board shall also approve the reassignment of the

full time Commissioners by the Director-General. The Director-General and the three full

time Commissioners shall be appointed by the President upon the recommendation of the

Minister and confirmation by the Senate. The Director-General shall hold office for a period

of 5 years in the first instance and may be reappointed for a further period of five years and

no more. The three full time Commissioners shall hold office in the first instance for a

59

period of four years and may be re-appointed for a further term of four years and no more.

The Chairman and part-time Commissioners (other than the ex-officio Commissioners shall

each hold office for a term of four years and no more. Notwithstanding the provisions of

subsections (1) and (2) of this section, the President may extend the tenure of office of the

Director-General and any of the Commissioners whose term of office has expired until a

successor to such Director-General or Commissioner is appointed. The Director-General and

the full time Commissioners shall devote their full time to the service of the Commission and

while holding office shall not hold any other office or employment except where appointed in

relation to his duties;

FUNCTIONS AND POWERS OF THE COMMISSION

The Commission shall be the apex regulatory organization for the Nigerian capital market

and shall carry out the functions and exercise all the powers prescribed in this Act and, in

particular, shall- regulate investments and securities business in Nigeria. register and regulate

securities exchanges, capital trade points , futures, options and derivatives exchanges,

commodity exchanges and any other recognized investment exchange; regulate all offers of

securities by public companies and entities; register securities of public companies; render

assistance as may be deemed necessary to promoters and investors wishing to establish

securities exchanges and capital trade points; prepare adequate guidelines and organize

training programmes and disseminate information necessary for the establishment of

securities exchanges and capital trade points; register and regulate corporate and individual

capital market operators as defined in this Act; register and regulate the workings of venture

capital funds and collective investments schemes in whatever form; facilitate the

establishment of a nationwide system for securities trading in the Nigerian capital market in

order to protect investors and maintain fair and orderly markets; facilitate the linking of all

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markets in securities with information and communication technology facilities; act in the

public interest having regard to the protection of investors and the maintenance of fair and

orderly markets and to this end establish a nationwide trust scheme to compensate investors

whose losses are not covered under the investors protection funds administered by securities

exchanges and capital trade points; keep and maintain a register of foreign portfolio

investments; register and regulate securities depository companies, clearing and settlement

companies, custodians of assets and securities, credit rating agencies and such other agencies

and intermediaries; protect the integrity of the securities market against all forms of abuses

including insider dealing; promote and register self regulatory organizations including

securities exchanges, capital trade points and capital market trade associations to which it

may delegate its powers; review, approve and regulate mergers, acquisitions, takeovers and

all forms of business combinations and affected transactions of all companies as defined in

this Act; authorize and regulate cross-border securities transactions; call for information

from and inspect, conduct inquiries and audit of securities exchanges, capital market

operators, collective investment schemes and all other regulated entities; promote investors'

education and the training of all categories of intermediaries in the securities industry; call

for, or furnish to any person, such information as may be considered necessary by it for the

efficient discharge of its functions; levy fees, penalties and administrative costs of

proceedings or other charges on any person in relation to investments and securities business

in Nigeria in accordance with the provisions of this Act; intervene in the management and

control of capital market operators which it considers has failed, is failing or in crisis

including entering into the premises and doing whatsoever the Commission deems necessary

for the protection of investors; enter and seal up the premises of persons illegally carrying on

capital market operations; in furtherance of its role of protecting the integrity of the

securities market, seek judicial order to freeze the assets (including bank accounts) of any

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person whose assets were derived from the violation of this Act, or any securities law or

regulation in Nigeria or other jurisdictions; relate effectively with domestic and foreign

regulators and supervisors of other financial institutions including entering into co-operative

agreement on matters of common interest; conduct research into all or any aspect of the

securities industry; prevent fraudulent and unfair trade practices relating to the securities

industry; disqualify persons considered unfit from being employed in any arm of the

securities industry; advise the Minister on all matters relating to the securities industry; and

perform such other functions and exercise such other powers not inconsistent with this Act as

are necessary or expedient for giving full effect to the provisions of this Act. The

Commission may establish specialized departments for the purpose of regulating and

developing the Nigerian capital market.

STAFF OF THE COMMISSION

There shall be for the Commission a Secretary who shall be appointed by the Commission.

The Secretary shall be a legal practitioner of not less than 10 years post call experience. The

Secretary shall act as Secretary to the Board of the Commission and its committees and

carry out other functions as may be prescribed by the Board. There shall also be appointed

by the Commission other staff as the Commission may deem necessary for the efficient

performance of its functions. The remuneration (including allowances) and the terms and

conditions of service of the Secretary and other staff of the Commission shall be determined

by the Board of the Commission. The Secretary shall- attend the meetings of the Board of

the Commission, and its committees and render all necessary secretarial services in respect of

the meetings and advise on compliance by the meetings with applicable laws and regulations;

keep and maintain records of the Board of the Commission; and carry out such

administrative and other secretarial duties as may be required by the Board of the

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Commission or the Director- General; The Secretary shall exercise the powers of the Board

only with the authority of the commission.

Every staff of the Commission shall be entitled to pension and other retirement benefits as

prescribed by law. Nothing in this section shall prevent the appointment of a person to any

office on such terms and conditions, which preclude the grant of pension and other retirement

benefits.

REGISTRATION AND REGULATION OF SECURITIES EXCHANGES, CAPITAL

TRADE POINTS AND OTHER SELF REGULATORY ORGANIZATIONS

No securities exchange or capital trade point as defined in section 315 of this Act shall

commence operation unless it is registered with the Commission in accordance with the

provisions of this Act and the rules and regulations made there under. An application for

registration as a securities exchange or capital trade point shall be made to the Commission

in the prescribed form and in the manner specified by the Commission Every securities

exchange or capital trade point shall be a body corporate incorporated under the Companies

and Allied Matters Act. The Commission may register a body corporate as a securities

exchange or capital trade point if it is satisfied that the rules of the body corporate make

satisfactory provisions- for the exclusion from its membership persons who are not of good

character and who do not possess a high degree of business integrity; for the expulsion,

suspension or discipline of members for conduct inconsistent with just and equitable

principles in the transaction of securities business or for contravention of or failure to comply

with the rules of the securities exchange or capital trade point or the provisions of this Act;

Conditions for registration.

with respect to the conditions under which securities may be listed for trading on that

particular securities exchange or capital trade point; with respect to the conditions governing

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dealings in securities by the members; with respect to the class or classes of securities

which may be dealt in by members; and with respect to a fair representation of persons in the

selection of members of the Board of the securities exchange or capital trade point and the

administration of its affairs and provided that listed companies and investors shall each be

represented by one or more members on its board. The Commission, in granting approval to

register a securities exchange or capital trade point under this section, shall ensure that the

interest of the public will be served by the grant of the approval. The Commission shall

issue a certificate of registration to a body corporate registered pursuant to this section. The

Commission may by order revoke the certificate of registration granted under

section 29 of this Act, if- the body corporate ceases to operate as a securities exchange or

capital trade point within the meaning of this Act; the body corporate is wound up; or the

body corporate is operating in a manner detrimental to the interests of investors and the

public. No order of revocation under this section shall be made unless the body corporate

has been given the opportunity of being heard.

Revocation of certificate of a securities exchange or capital trade point.

Where an amendment is made to the rules or the listing requirements of securities Exchange,

capital trade point or other self regulatory organization, whether by way of Recession,

amendment, alteration, deletion, substitution or addition, the Board of the securities

exchange, capital trade point or other self regulatory organization shall forward a written

notice of the amendment to the Commission for approval. The Commission shall notify the

securities exchange, capital trade point or other self regulatory organization as to whether or

not the Commission approves the whole or any specified part of the amendment in question,

and until such notification is received, the amendment shall be of no effect. Nothing in this

section shall preclude the Commission, after consultation with the board

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Approval of amendments to listing rules 19 of a securities exchange, capital trade point or

other self regulatory organization from amending the rules or the listing requirements of the

securities exchange, capital trade point or other self regulatory organization by a notice in

writing specifying the amendment and the date the amendment shall come into effect. Any

notice under this section may be served personally or by registered post. Subject to the

powers of the Commission under this Act, a securities exchange, capital trade point or any

other self regulatory organization shall, as part of its primary responsibility, call for

information from, inspect and conduct inquiries and audit of its members. A securities

exchange, capital trade point or self regulatory organization, shall at the end of every

quarter file a detailed report on its surveillance and enforcement activities with the

Commission. Nothing in this section shall preclude the Commission from carrying out

inspections, or conducting enquiries or audit of any member of a securities exchange, capital

trade point or other self regulatory organization.

Role of securities exchange, capital trade point and other self regulatory organizations.

Where a securities exchange capital trade point or other self regulatory organization

reprimands, fines, suspends, expels or otherwise takes disciplinary action against a member

of the securities exchange, capital trade point or other self regulatory organization, the

securities exchange, capital trade point or self regulatory organization shall, within 7 days

notify the Commission in writing of the name and other particulars of the member, the nature

of and reason for the action taken by the securities exchange, capital trade point or other self

regulatory organization against the affected member.

Notice of Disciplinary actions

Securities exchange, capital trade point or self regulatory organization to give notice of

disciplinary actions, The Commission may review any disciplinary action taken by a

securities exchange, capital trade point or other self regulatory organization against its

65

members and may affirm or set aside such decision after giving the member and the securities

exchange, capital trade point or self regulatory organization an opportunity of being heard.

Nothing in this section shall preclude the Commission from suspending, expelling or

otherwise imposing or causing disciplinary action to be taken against a member of a

securities exchange, capital trade point or other self regulatory organization where a

securities exchange, capital trade point or other self regulatory organization fails to act

against a member: Provided that, before exercising the power conferred upon it by this

subsection, the Commission shall give the affected member and the securities exchange,

capital trade point or self regulatory organization an opportunity of being heard.

Review of disciplinary actions taken by a securities exchange, capital trade point or self

regulatory organization.

The Commission may, where it deems appropriate, issue directives to a securities exchange,

capital trade point or any other self regulatory organization with respect to- trading on or

through the facilities of that securities exchange, capital trade point or self regulatory

organization or pertaining to any securities listed on the securities exchange, capital trade

point or self regulatory organization; the manner in which a securities exchange, capital

trade point or self regulatory organization carries on its business including the manner of

reporting off-market purchases; or any other matter which the Commission considers

necessary for the effective administration of this Act, and the securities exchange, capital

trade point or self regulatory organization shall comply with the directives. No action shall

be competent before any court of law or tribunal with regard to any directive by the

Commission under subsection (1) of this section without the joiner of the Commission as a

party. A securities exchange, capital trade point or any other self regulatory organization

which, without reasonable excuse, fails or refuses to comply with a directive given under

subsection (1) of this section shall be liable to a penalty of N1,000,000 and a further penalty

66

of not less than N50,000 for every day during which the non-compliance continues. Where

the Commission, after giving an executive officer of a securities exchange, capital trade point

or any other self regulatory organization an opportunity of being heard, is satisfied that such

officer has contravened, failed or refused to comply with the provisions of this Act or any

regulations made there under or the rules of the securities exchange, capital trade point or self

regulatory organization, the Commission may suspend or remove the executive officer from

office. The Commission may, in the public interest or for the protection of investors, and

after giving the executive officer an opportunity of being heard, direct the securities exchange

or capital trade point or any other self regulatory organization in writing to remove the

executive officer and where the securities exchange or capital trade point or self regulatory

organization fails to comply with the directive of the Commission under subsection (4) of this

section, the Commission may suspend or remove the executive officer from office.

Power to issue directives to a securities exchange, capital trade point or self regulatory

organization,

Where the Commission deems it necessary for the protection of persons buying or selling

particular securities made available by a body corporate on a securities exchange, capital

trade point or any other self regulatory organization, it may suspend or prohibit further

trading in the securities and give notice in writing to the securities exchange, capital trade

point or self regulatory organization. If, after receiving the notice given under subsection (1)

of this section, the securities exchange or capital trade point or self regulatory organization

fails to take action to prevent trading in the securities to which the notice relates, the

Commission may, by notice in writing, to the securities exchange, capital trade point or other

self regulatory organisation prohibit trading in the securities of the body corporate during

such period, not exceeding 14 days; provided that the Commission shall have the power by

notice in writing to increase the period for a further period not exceeding 30 days at a time.

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A securities exchange, capital trade point or any other self regulatory organisation, which

permits trading in securities in contravention of a notice under subsection (2) of this section is

liable to a penalty of N1,000,000 and a further sum of N50,000 for every day during which

the contravention continues. Where, after the expiration of the second period of suspension

of trading in the securities of a body corporate, the body corporate, securities exchange,

capital trade point or self regulatory organization, still refuses to comply with the directives

of the Commission given pursuant to the provisions of this section, the Commission may-

revoke the registration of either or both the body corporate and securities exchange, capital

trade point or self regulatory organization; refuse to consider or process any further request or

application for approval, registration or consent made or to be made to the Commission by

the body corporate or securities exchange, capital trade point or self regulatory organisation;

apply to the Court under the Companies and Allied Matters Act for- the winding up of the

body corporate or securities exchange, capital trade point or self regulatory organisation; an

official receiver to take over management under supervision of the court in respect of the

registered company or securities exchange, capital trade point or self regulatory organization

as if the Commission were a creditor thereof after giving a hearing to serving officers,

appoint competent person(s) nominated by the Commission in place of the serving chief

executive officer and executive management and board of the registered company or

securities exchange, capital trade point or self regulatory organisation; apply to the Tribunal

for an enforcement order in respect of its directive to suspend trading on the specified

securities: Provided that the Commission may take any of the forgoing actions where it

considers that the interest of investors or of members of the public or the integrity of the

market so requires. A securities exchange, capital trade point or any other self regulatory

organisation shall maintain proper books of account and records relating to its operations

which shall be made available for inspection by the Commission.

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REGISTRATION AND REGULATION OF CAPITAL MARKET OPERATORS

No persons shall- operate in the Nigerian capital market as an expert or professional or in

any other capacity as may be determined by the Commission; or carry on investments and

securities business unless the person is registered in accordance with this Act and the rules

and regulations made there under. The Commission shall prescribe the conditions for

registration including the level of knowledge and skill required to operate in the capital

market An application for registration under this part of this Act shall be in the manner and

upon payment of the fees prescribed by the Commission. The Commission may by order

suspend or cancel a certificate of registration in the manner prescribed but no order under this

subsection shall be made unless the person concerned has been given a reasonable

opportunity of being heard. Where the Commission, after giving an officer of a capital

market operator, an opportunity of being heard, is satisfied that such officer has contravened,

failed or refused to comply with the provisions of this Act or any regulations made there

under, the Commission may suspend or remove that officer from office. Where the

Commission, after giving an officer of a capital market operator an opportunity of being

heard, is satisfied that such officer has contravened, failed or refused to comply with any

provision of this Act or any regulations made there under, the Commission may in the public

interest or for the protection of investors, direct the capital market operator to suspend or

remove the officer from office and where the capital market operator fails to comply with the

directive of the Commission, the Commission may suspend or remove the officer from office.

Registration of capital market operators.

A capital market operator shall keep or cause to be kept such accounting and other

records- as shall sufficiently show and explain the transactions and financial position of his

business and enable true and fair profit and loss accounts and balance sheets to be prepared,

regularly; and in a manner that will enable them to be conveniently and properly audited. A

69

capital market operator shall be deemed not to have complied with subsection (1) of this

section in relation to records unless the accounting and other records of the capital market

operator - are kept in sufficient detail to show particulars of- all monies received or paid by

the capital market operator, including monies paid to or disbursed from a trust account,

Accounts to be kept by capital market operator.

all purchases and sales of securities made by the capital market operator, the charges and

credits arising from them, and the names of the buyers and sellers, respectively of each of

those securities, all income received from commissions, interest, and other sources, and all

expenses, commissions, and interest paid by the capital market operator, all the assets and

liabilities (including contingent liabilities) of the capital market operator, all securities which

are the property of the capital market operator showing by whom the securities or the

documents of title to the securities are held and, where they are held by some other person,

whether or not they are held as securities against loans or advances, all securities that are not

the property of the capital market operator and for which the dealer or any nominee

controlled by the security dealer is accountable, showing by whom, and for whom, the

securities or the documents of title to the securities are held and the extent to which they are

either held for safe custody or deposited with a third party as securities for loans or advances

made to the capital market operator, all purchases and sales of options made by the capital

market operator and all fees (being options monies) arising from them, all arbitrage

transactions entered into by the capital market operator; and all underwriting transactions

entered into by the capital market operator. are kept in sufficient detail to show particulars of

every transaction by the capital market operator; specify the day on which or the period

during which each transaction by the capital market operator took place; and contain copies

of acknowledgements of the receipt of securities or of documents of title to securities

received by the capital market operator from clients for sale or safe custody clearly showing

70

the name or names in which the particular securities are registered. Without prejudice to

subsection (2) of this section, a capital market operator shall keep records in sufficient detail

to show particulars of all transactions by the capital market operator with or for the account

of- clients of the capital market operator; the capital market operator himself; and

employees of the capital market operator. A capital market operator who contravenes or fails

to comply with any of the provisions of this section commits an offence and is liable on

conviction to a fine of not less than N500, 000 or to a term of imprisonment of not less than

one year or to both such fine and imprisonment. The Commission may, in lieu of

prosecution for the offence prescribed in subsection of this section, sanction a capital market

operator who violates the provisions of this section by imposing a penalty of not less than

N500,000 and a further sum of not less than N5,000 for every day in which the violation

continues. A capital market operator shall maintain separate accounts for transactions

carried out on behalf of different clients. No capital market operator shall mix the proceeds

of the account of a client with other accounts whether belonging to the capital market

operator or his clients. A capital market operator shall establish and keep in a bank or banks

one or more trust accounts to be designated or evidenced as trust accounts, into which the

capital market operator shall pay- all amounts (less any brokerage and other proper charges)

received from or on account of any person (other than a capital market operator) for the

purchase of securities which are not attributable to securities delivered to capital market

operator; and all amounts (less any brokerage and other proper charges) received for or on

account of any person (other than a capital market operator) from the sale of securities which

are not paid to that person or as that person directs not later than the next banking business

day following the day on which they were received by the capital market operator. The

payment of amounts required by subsection (3) of this section to be made by a capital market

operator shall be made by the capital market operator not later than the next banking business

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day following the day on which the amounts were received by the capital market operator. A

capital market operator who contravenes or fails to comply with any of the provisions of this

section is liable to a penalty of N100,000 and a further sum of x5,000 for every day the

violation continues.

Maintenance of separate accounts and payment into certain trust accounts.

A capital market operator who withdraws money from a trust account without the requisite

authority commits an offence and is liable on conviction to a fine of not less than N500, 000

or to a term of imprisonment not less than one year or to both such fine and imprisonment.

For the purpose of subsection (1) of this section, a withdrawal from a trust account shall be

deemed to be without requisite authority where the withdrawal is made for a purpose other

than- to pay the person entitled to the payment; to defray brokerage and other proper

charges; or as may otherwise be authorized by law. The Commission may, in lieu of

prosecution for the offence prescribed under subsection (1) of this section, sanction a capital

market operator who violates the provisions of this section by imposing a penalty of not less

than x500,000.

Penalty for withdrawing money from trust account without authority.

In addition to the penalty prescribed under subsection (3) of this section, the

Commission shall direct the capital market operator to refund the monies received together

with the interest thereon at a rate to be determined by the Commission. A capital market

operator who, withdraws money from a trust account with intent to defraud, commits an

offence and is liable on conviction to a fine of not less than x500,000 or to imprisonment for

a term of not less than one year or to both such fine and imprisonment. A capital market

operator shall not except as otherwise provided in this part of this Act pay his debts with any

money held in a trust account. Monies held in a trust account shall be liable to be paid or

taken in execution of an order of a court or tribunal.

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Money in trust account not available for payment of debt.

Nothing in this section shall be construed as taking away or affecting any lawful claim or

lien which a person may have against or upon any monies held in a trust account or against or

upon any monies received for the purchase of securities or from the sale of securities before

such monies are paid into a trust account.

Claims and lien not affected.

A capital market operator or depository shall supply on demand to his client copies of all

entries in his books relating to any transaction carried out on behalf of that client, and he shall

be entitled to levy a reasonable charge thereof. A client or any person authorised by the

client shall be entitled at any time, free of charge either personally or by his agent, to inspect

any contract notes and vouchers relating to the said transaction.

2.3.3 Historical Evolution of the Nigerian Capital Market

The origins of the Nigerian Capital Market date back to colonial times when the British

Government ruling Nigeria at the time sought funds for running the local administration.

Most these funds derived from agriculture, produce marketing and solid mineral mining.

Discovering that these sources were inadequate to meet its growing financial obligations, the

colonial administration decided to expand its revenue base by reforming the system of

revenue mobilization, taxation and other payments. It also saw the need to raise funds from

public sector to cover temporary shortfalls in funds availability. Hence, it found it necessary

to establish a financial system by setting up the basic infrastructure for its take off pending

the development of an organized private sector. According to Odife (2000:6), the first step in

this direction was to secure the necessary finance for the development of this infrastructure

and long-term capital project. This it did in 1946 when it promulgated the 1946 10-year plan

Local Loan Ordinance for the floatation of the first N300,000, 3% Government stock 1956/61

with its management vested on the Accountant-General. In 1957, the government and Other

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Securities (Local Trustees Powers) Acts was enacted. This law specified the types of

securities in which trust funds may be invested. It also clearly defined the powers and

responsibilities of trustees. In addition, the colonial government set up the Professor Barback

committee to examine the ways and means of fostering a share market in Nigeria. Part of the

terms of reference of this committee included the possibility of establishing a capital market

in Nigeria. The committee recommended, among others, the creation of facilities for dealing

in shares, the establishment of rules regulating share transfer and measures for encouraging

savings and issues of securities of government and other organizations. By the end of the year

(1957), the colonial administration had promulgated the General Loan and Stock Act and the

Local Loan (Registered Stock and Securities) Act on the recommendations of the Barback

Committee. In 1958, the Central Bank of Nigerian was established through the Central Bank

of Nigeria Act of 1958. The purpose of these various legislations was to establish the legal

and infrastructural frame work for the take off of a viable securities/capital market in Nigeria.

As a follow up to these laws, the colonial administration issued the first N2 million

Federation of Nigeria Development Loan Stock in May 1959. In 1959, it also enacted the

Statutory Corporations (Guarantee of Loans) Act. In April 1960, the Central Bank of Nigeria

issued the first Nigerian Treasury Bills which were meant to provide an avenue for the

investment of short-term liquid funds in Nigeria and assist in providing government with

funds pending receipt of its own revenues. On September 15, 1960, the Lagos Stock

Exchange was incorporated as a private limited liability company, limited by guarantee under

the provisions of the Lagos Stock Exchange Act 1960. The Lagos Stock Exchange Act 1960

conferred monopoly powers on it members to deal in securities granted quotation on the

Exchange. It also allowed the Central Bank to Deal directly in securities. On June 5, 1961,

the Lagos Stock Exchange opened for business with 19 listed securities made up of 3

equities, 6 Federal Government Bonds and 10 industrial loans. In 1961, “the National

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Provident Fund was established as a compulsory contributory savings scheme aimed at

providing some protection to contributors at old age, invalidity or temporary loss of

employment”. The enabling Act required the Fund to invest its surplus funds only in

securities in Nigeria authorized by the Trustee Investment Acts of 1957 and 1962 and

restricted to securities created or issued by or on behalf of the government of the federation

(SEC, 1999:49). By 1962, the Exchange Control Act and Trustees Investment Act were

enacted. The Capital Issues Committee was also constituted to examine and recommend the

establishment of an apex monitoring institution for the growing Nigerian Capital Market. In

1966, the Borrowings by public Bodies Act was enacted. This was followed in 1968 by the

Companies Decree and the Banking Decree in 1969. In 1972, the Nigerian Enterprises

Promotion Decree was promulgated which was followed in 1963 by the Capital Issues

Commission Decree. The Capital Issue Committee thus became the apex regulatory body for

the Nigeria Capital Market. By this decree, it was empowered to determine the price and

timing of new issues of securities through offer for sale or for subscription. In 1977, the name

of the Lagos Stock Exchange was changed to the Nigerian Stock Exchange by the

Indigenization Decree of 1977 followed the recommendations of the Industrial Enterprises

Panel (Adeosun Panel) of 1975 that branch exchanges should be established. As a result, six

new trading floors of the Nigerian Stock Exchange were created in Kaduna (1978), Port

Harcourt (1980), Kano (1989), Onitsha (1990) and Yola (2002). On April 1, 1978, the

Securities and Exchange Decree was promulgated to replace the Capital Issues Commission

and expand the scope of its activities following the recommendations of the Financial System

Review Committee (Okigbo Committee) of 1976. The Committee also recommended the

establishment of multiple exchanges and the approval of share allotments by the Securities

and Exchange Commission. In 1978, the first state government revenue bond was floated by

the defunct Bendel State of Nigeria. The N20 million 7% first Bendel State Loan was floated

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to finance the state’s housing development programme. On April 5, 1985, the Second-tier

Securities Market (SSM) of the Nigerian Stock Exchange was established to cater for the

requirements of small and medium scale enterprise. It essentially diluted the listing

requirements of this category of companies to encourage them to seek quotation and thereby

further broaden and deepen the market. In 1987, the Nigerian Enterprises Promotion Decree

34 (Issue of non-voting equity shares) was promulgated permitting public companies quoted

on the Nigerian Stock Exchange to issue through the Exchange, non-voting paid-up shares for

the subscription of persons whether citizens of Nigeria or not and whether resident in Nigeria.

In 1988, the functions of the Securities and Exchange Commission were further expanded by

Decree 29 of 1988 to include the review and approval of all mergers, acquisition and

combinations between or among companies. In 1988 also, the Privatization and

Commercialization Decree 25 was promulgated. This Decree provided for the privatization of

some enterprises in which the Federal Government of Nigeria has equity interest and the

commercialization of some Federal Government wholly-owned enterprises. The exercise that

ensued from this Decree brought more companies to the Nigerian Stock Exchange whose

shares were thus listed. Similarly, in 1958, Debt Conversion was officially adopted by the

Central Bank of Nigeria and a guideline on the debt conversion programme published. The

Nigerian Deposit Insurance Corporation was also established in 1988 to monitor the

performance of the banking sector and insure depositors against possible bank distress and

consequent loss of funds. In 1989, the Companies and Allied Matters Act (CAMA 1990) was

enacted to regulate the incorporation, corporations and activities of all bodies in Nigeria.

Specifically, Sections 541-623 cover “dealings in the securities of companies and vests its

administration on the Corporate Affairs Commission. Indeed, the CAMA, 1990 is a

comprehensive securities law for the country as it deals with a wide range of issues such as

invitation of the public to securities offer, registration of securities, prospectus, allotment,

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unit trusts, reconstructions, mergers and takeover as well as insider trading” (SEC<

1990:53).By 1991, following the spate of large scale distress in the financial system, the

Banks and Other Financial Institutions Decree 25 (BOFID), 1991was promulgated to monitor

the operations of the banking and financial sector and reduce the tide of distress. In 1991, the

Inter-ministerial Committee on the Nigerian Capital Market recommended the

discontinuation of official pricing of securities as well as the establishment of more stock

exchanges. The Central Bank of Nigeria Decree of 1991 was also promulgated; this decree

expanded the functions of the Central Bank granting it greater autonomy in monetary policy

and repealed the Central Bank of Nigeria Act 1958. In 1992, the first municipal bond in the

Nigerian Capital was floated by the Lagos Island Local Government. The first Lagos Island

Local Government Floating Rate Revenue Bond N100 million was floated to finance the Sura

Shopping Complex in Lagos. The coupon rate was 24.75%. In 1992, The Chartered Institute

of Stockbrokers Decree was promulgated which granted the Institute of Stockbrokers powers

to charter stockbrokers and dealers, conduct examination for brokers and genrally oversee the

conduct of its members in the interest of the orderly development of the capital market. On

July 29, 1992, the Central Securities Clearing System was incorporated as the official central

clearing and depository of the Nigeria Stock Exchange. The CSCS was incorporated to

implement a computerized Stock Exchange Management System (SEMS) which emphasizes

the immobilization of share certificate in a Central Depository. In 1993, the federal

government, through its budgets presentation, formally deregulated the capital market, thus

ending the official pricing, timing and allotment of securities issues. These functions were

passed on to the issuing houses to perform. In 1993, the second Kaduna State Revenue Trust

Fund (NSITF) was created by decree to replace the National Provident Fund. By this Act, the

scope of activities of the National Provident Fund was expanded and the National Provident

Fund Act thereby repealed. In 1995, the Nigerian Investment Promotion Act No.16 of 1995

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was enacted to guarantee the ease of transfer of funds through authorized dealers. It stipulated

the funds that can be transferred out by foreign investors to include:

(a) Dividends and profits (net of taxes) attributable investments;

(b) Payment in respect of loan servicing where a foreign loan has been obtained;

(c) The remittance of proceeds (net of taxes) and other obligations in the event of a sale or

liquidation of investments or any interest attributable to the investor.

In 1995, the Exchange Control Act of 1962 and the Nigerian Enterprises Promotion Decree

of 1989 were abrogated to promote greater foreign investment in Nigeria. In 1995, the

Nigerian Investment Promotion Council was established by Decree 16 of 1995 to promote

industrial growth and development through the attraction of foreign capital and

encouragement of domestic savings and investment. On March 19, 1996, the Federal

Government of Nigeria appointed the panel on the Review of the Nigerian Capital Market

(The Odife Panel). Members of the Panel included Chief Dennis Odife (Chairman), Otunba

A. O. Ogunde, Dr. Ahmed Abdullahi, Alhaji Baba Danbappa, Prince Lekan Fadina

(Members), Mr. O. G. Abiose and Mrs M. A. Lashmann (Secretaries). The terms of reference

of the Panel were:

• To review the history, structure, conduct and performance of the Nigerian Capital Market and

its contributions to the Nigerian economic development;

• To examine the objectives for the establishment of the Nigerian Capital Market and their

continued relevance to Nigeria’s contemporary and prospective needs and aspirations, and

make appropriate recommendations;

• To anticipate the likely direction of evolution of the Nigerian economy in the next century

and project how the capital market should develop to respond to the needs of the economy;

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• To analytically examine the present state of the Nigerian Capital Market and formulate a

concise framework geared towards the creation of a conductive atmosphere for the orderly

growth and development of the Market;

• To access the continued adequacy of the structure, law , institutions and overall framework of

the capital marketing in the light of the evolution of the Nigerian economy and of recent

developments in the money market, as well as of the needs of the economy as the nation is

approaching the twenty-first century;

• To indentify and itemize all laws and regulations prescribing the conduct of capital market

activities and institutions, and to assess their continued relevance;

• To codify all laws and regulations prescribing capital market activities, behavior and

institutions into one comprehensive law applicable to all;

• To recommend measures to strengthen the laws, structures, the institutions and the frame

work (including manpower training) of the capital market to make it more responsive to the

needs of all economic units, be they at the federal, state, local government or village level;

• To examine the structure of the Nigerian Stock Exchange and its branches and their adequacy

in the context of the Federal Government Privatization Programme and policy of ensuring

widespread shareholding, and make appropriate recommendations;

• To review the role of regulatory and or supervisory agencies and the adequacy of the

regulatory/supervisory oversight process, including the number and adequacy of the self

regulatory organizations established for the purpose;

• To recommend, it the light of the findings above, precautionary measures to be put in place

and appropriate steps to be taken to ensure that Nigerian Capital Market functions optimally

henceforth and that it becomes continuously alive to the needs of both local and foreign

investors;

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• To consider the desirability or otherwise of setting up an appropriate informal judicial forum

within the capital market for the prompt determination of any questions, dispute or

controversy that may arise between the institutions in the Nigerian Capital Market, inter se,

or market operators generally;

• To make suggestions and recommend appropriate incentives necessary to be injected from

time to time by any government of the Federation into the Nigerian Capital Market to

ensure the attainment of the targeted growth indices between investments and capital market

development; and

• To recommend such other actions as may be considered desirable at this stage having regard

to the present policy thrust of the federal government in the sphere of capital market

development.

The panel concluded its assignment and submitted its final report dated September 24, 1996

to the Honourable Minister of Finance on Thursday October 10, 1996. The report of the Panel

culminated in the promulgation of the Investment and Securities Act 1999. On June 26, 1996,

the African Capital Market Forum was formally launched in Accra, Ghana to: (i) Promote the

establishment of formal capital market in Africa; (ii) Accelerate the development of existing

markets; (iii) Promote cooperation among African Capital Market Institution; and (iv)

Provide a forum for the exchange of ideas among African Capital Market Institutions. On

June 17, 1998, the Abuja Stock Exchange (ASE) was incorporated as a Public Limited

Liability Company as the second bourse in Nigeria after the Nigerian Stock Exchange. On

July 13, 1998, Rights Issues were permitted for trading as the first derivative instrument in

the Nigerian Stock Market. The Investment and Securities Act No.45, 1995 was promulgated

into law with a commencement date of May 26, 1999. The Act repealed the Securities and

Exchange Commission Decree of 1998, the Lagos Stock Exchange Act of 1960, the Nigerian

Enterprise Promotion (Issues of Non-Voting Equity Shares) Decree of 1990, Part XVII of the

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Companies. Allied Matters Act of 1990, Sections 3(d) of the capital Gains Act and Section 21

(2) of the Nigerian Investment Promotion Decree of 1995. The Act became the basic

legislation guiding the conduct and operations of the Nigerian Capital Market. On April

1999, the Automatic Trading System was introduced in the Nigerian Stock Market to replace

the open outcry method. The Automated Trading System is a security trading arrangement

whereby transactions on the stock exchange are achieved through a network of computers

operating on-line, real-time, automatically. This increased settlement efficiency from T+2

weeks to T+3 days. In 1998, the first foreign stock, M-NET Super sport of South Africa, was

listed on the Nigerian Stock Exchange. In 2000, the Edo State Government issued N1 billion

7 years floating rate bond to finance its Ogba Riverside Housing Project. The initial size of

the bond was N5000 million but it was oversubscribed by 103% which led to the absorption

of the excess through the issuance of a supplementary prospectus. The 2000/06 bond bore a

21% coupon rate. In 2000, the Delta State Government raised n3.5 billion from the capital

market being the first tranche of a projected N5 billion 7-year floating rate bond. The

proceeds were used to fund a water supply scheme in Warri/Effurun, provision of educational

facilities in all the local government councils of the state, rehabilitation of twelve general and

central hospitals and the development of modern markets in Effurum and Ughelli: The

16.50% coupon bond was 101.74% subscribed. In May, 2001, The Nigerian Stock Exchange

(NSE) all-share index crossed the 10,000 point mark, ending the month of 10,153.8. On May

2, 2001, the Abuja Stock Exchange began operation as a floorless, electronically-driven

exchange with a fully automated order-driven screen-based trading system. The Abuja Stock

Exchange opened for operation on May 2, 2001 with four companies listed on a Permission-

To-Trade (PTT) basis. These were FSB International Bank Plc, Inland Bank Nigerian Plc,

Ashaka Cement Exchange.

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2.3.4 Development of the Nigerian Capital Markets.

The Nigerian Stock Exchange, (NSE) was established in 1960 as the Lagos Stock

Exchange by the Stock Exchange Act of 1961 as a self-regulatory organization. In December

1977, it became the Nigerian Stock Exchange with branches established in different parts of

the country. At present, there are six branches of the Nigerian Stock Exchange. Each branch

has a trading floor. The Lagos branch was opened in 1961, Kaduna, 1978; Port Harcourt

1980, Kano, 1989; Onitsha, February 1990 and Ibadan, August 1990.

The controversial second stock Exchange, proposed for the Federal Capital Abuja was

due to open in 1998 despite business view that the country was being served adequately by

the Lagos Exchange. The new exchange was to be established with a share capital of 1 billion

naira and issued share capital of 500 million naira. The exchange is seen by many as

unnecessary duplication and that the move is based largely on political motives, as

government has long tried to persuade business to relocate to Abuja. Abuja office also has

commenced work. Lagos is the head office of the Exchange.

(nigerianinvestment.com/dowybusiness/nigerianstockexchange.html).

The Exchange started operations with only 19 securities traded on its floor in 1961,

the Exchange now has 264 securities made up of 26 government stocks, 57 industrial loan

(Debenture) preference stock and 181 equity/ ordinary shares of companies, all of which a

total market capitalization of approximately N335 billion. Most of the listed companies have

foreign/multinational affiliation and represent a profile of the various sectors of the economy,

ranging from automobile, banking, airlines, breweries, through pharmaceutical to agro-allied,

publishing, textile, petroleum and insurance companies. The companies can also trade in

rights issues whereby a shareholder can sell his right.

With the internationalization of the NSE, quoted companies can now access funds

from international markets through Global Depositary Receipts GDR, American Depositary

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Receipts ADR etc using their shares as underline securities. The NSE has a tested network of

over 200 stock brokerage firms, issuing houses (Merchant Banks), and practicing corporate

law firms and over 50 quality firms of auditors and reporting accountants. The Stock

Exchange and the most of the nations stock broking firms and issuing houses are strapped

with creative financial engineers that can compete anywhere in the world. There is therefore,

a network of intimidating organizations that can effectively and creditably meet the

challenges and growing needs of investors (http//www.nse.com.ng).

The Nigerian Stock Exchange’s motto is “Our Word is Our Bond” and is currently the

only Stock Exchange in the country. It is owned by members and directed by the council,

which has an upper limit of 25 members comprising individuals who by their track records

can make valuable contributions, institutions, and stock broking companies. Each group

controls one-third members of the council. The council makes decisions on the policies of the

NSE. These decisions are carried out by a full-time executive headed by the Director-

General. The money to pay for the operation of the exchange comes mainly from two

sources: The members of the NSE and the companies listed on the NSE. Members pay a

membership fees, called an annual subscription, every year.

2.3.5 ADMINISTRATIVE CHALLENGES CONFRONTING THE NIGERIAN

CAPITAL MARKETS

WALL STREET – WHERE IT ALL BEGAN

Securities are traded in a variety of forms and in diverse trading places. Wall Street is

where it all began (The New York Institute of Finance; 1992), but one will see that the

Nigerian financial market – place today bears little resemblance to its origin there.

According to the Institute, prior to the Revolution, New York City's leading merchants met

daily under a buttonwood tree located at what is today the corner of Wall and Broad Streets.

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These early merchants traded in commodities such as furs, tobacco and currencies and

provided services, such as insuring ships' cargoes.

As companies were organized to conduct different types of commercial activities such

as banking, retail trade, or shipping, an informal market in shares of these companies

developed among the merchants who controlled them. Twenty four of these early merchants,

or stockbrokers, as they came to be called, entered into a formal agreement on May 17, 1792,

to trade only among themselves and to maintain agreed - on commission rates. This marked

the founding of what is today the New York Stock Exchange (NYSE).

2.3.6 The Nigerian Capital Market

The Capital Market, according to Professor Ndi Okereke Onyiuke (2010), is made up

of markets and institutions, which facilitate the issuance and secondary trading of long – term

financial instruments. She argued that the capital market, unlike the money market which

functions basically to provide short-term funds, provides funds to industries and governments

to meet their long term capital requirements, such as financing of fixed investments –

buildings, plants, machinery, bridges etc.

The Nigerian Capital Market is a market for sourcing of medium and long-term funds

by both the government and private sectors of the economy. The strategic roles of the capital

market in the allocation of scarce financial resources for rapid economic growth and

development of any nation is well documented. For example, Oladejo, R. (2003) enumerates

the gains of the Nigerian capital market as follows:-

Helps the economy to increase capital formation;

Provides funds to government and companies at more attractive terms; Provides best

source of funding for SME growth; Subjects firms to market discipline thus enhancing

chances of success; provides the necessary elements to manage financial risks and ensures

continuity of the enterprise long after the founder.

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Persuade. B (1990) enumerates the role of capital markets in economic development

to include:- Provides additional channels for encouraging and mobilizing domestic savings

for productive investments and an alternative to bank deposits, real estate investment and the

financing of consumption loans;

Fosters the growth of the domestic financial services sector and various firms of

institutional savings such as life insurance and pensions; Provides savers with better

protection than most debt instruments against inflation and currency depreciation and thus

alleviates two of the major reasons encouraging the flight of domestic capital aboard as well

as providing attractive vehicle for repatriating flight capital; Encourages privatization by

increasing the marketability of new issues. This marketability also facilitates the dispersal of

ownership form traditional industrial and financial interests; Improves the gearing of the

domestic corporate sector by facilitating equity financing, and this helps to reduce corporate

dependence on borrowing, thus making the financial system more solvent; Provides, through

equity financing, a cushion for companies against the variability of cash flows and even

possible losses. Also, it is permanent financing which does not demand regular fixed returns

like debt.

With all the above enumerated roles of the Nigerian capital market, however,

attainment of such goals is not feasible without the pivotal role of the Nigerian stock

exchange. The Nigerian capital market without the Nigerian stock exchange is like a car

without a fuel to propel it. The Nigerian stock exchange is therefore a self – regulatory

organization (SRO). It regulates its members (brokerage firms). It also regulates its listed

companies to ensure compliance with listing rules. Directors of companies stand in a

fiduciary relationship with their companies and are expected to run their companies with

utmost good faith, competence and integrity. Audit committees of publicly quoted companies

are also vital organs of integrity in corporate governance. External auditors also play a pivotal

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role in ensuring the integrity of information emanating form companies quoted on the

exchange, as they are statutorily required to attest to the financial statements published by

such companies. Others include issuing houses, reporting accountants, lawyers and

investment analysts.

Sadly, however, the Nigerian stock exchange is yet to score high on integrity. Witness

the African Petroleum debt concealment saga, the famous Nestle Foods and Unilever shares

scam. Asalu A. (2002; 67) pointedly accused the Nigerian Stock Exchange (NSE) and its

subsidiary Central Securities Clearing Service (CSCS) limited of engaging in insider dealing.

The Central Bank of Nigeria (CBN) has also been persistent in accusing banks, many of them

players in the capital market, of consistently sending false returns to it. For example, in the

wake of the closure of savannah bank plc (before its license was released back in 2010), CBN

reported that it was unable to confirm a figure of N2.2 billion said to be cash in hand in the

bank on a particular day for the simple reason that several rural branches of the bank were

reported to be holding cash far in excess of their deposit base (Adewale; 2006)! In the same

vein, Onosode, G. O (2001) is unrelenting in his attack on Nigerian company directors who

allow personal interest to color their official actions and some Nigerian auditors who allow

their cozy relationship with directors to color their disinterestedness in carrying out their

work. Yet, to say that lack of integrity is peculiar to the Nigerian capital market is to miss the

point.

However, the crisis of integrity is exacerbated in the Nigerian capital market scene for

reasons that include:- Absence of a strong and well funded regulator; A socio-economic

environment that extols wealth however made; An investor group that is largely illiterate and

fragmented; Suffocating competition that encourages unorthodox practices as firms try to

stay afloat and ahead of competition;

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Weak legal framework; Weak internal control environment as a result of employment

polices that place less emphasis on merit and integrity; A company directorship class that is

greedy and self serving; Weak audit committees as a result of membership that is largely

financially illiterate and ill-motivated because of absence of remuneration for services

rendered; Weak external audit function partially as a result of few bad eggs in the profession

and partly as a result of fetters placed on independence of the auditors in actual practice

(Uche Ezechukwu in business day august 18, 2010).

2.3.7 NSE CRISIS: THE ROOT CAUSE

According to a financial times report of June 23, 2008, some investors were, even

prior to the global economic meltdown, "troubled by high valuations, dubious corporate

governance, rampant speculation and suspicions of market manipulation. So even without the

global downturn, according to the report, the over-inflated Nigerian stock was subject to wide

spread abuse and insider trading of unimaginable magnitude and was headed for disaster. The

period 2002 – 2008 was a one of boom for the Nigerian economy. Nigeria's foreign reserves

rose to $57.2bn at the end of December 2008. Crude oil prices hit a peak of $147 per barrel in

July 2008. During the period, Nigerian stock market capitalization rose to peak at N12.6

trillion on March 2008. The boom in stock led to a mad rush by almost all Nigerians to invest

in stocks. According to Singleton (2008; 9), "Banks in the country exploited the made rush

and transformed themselves into issuing houses, brokers and bankers all in one (all the

Nigerian banks formed issuing houses). They capitalized on the boom to exert money from

the unsuspecting public". In the same vein, Agbana (2009; 6) argued that "some banks

embarked on multiple issues over short period of time, throwing capital market rules and

regulations on offer of issues to the wind. In a period of three years, a notable bank in the

country, organized three public offerings, first in 2005, then in 2006 and again in 2007. They

87

were raking in money from the unsuspecting public, until the shares price of the bank peaked

at N35". The rising share prices encouraged more people to borrow and invest; hoping that

the shares prices would rise further. The price rose above the capacity of ordinary people to

buy shares and the stockbrokers simply lent more. The speculation thus fueled further rises

and created an economic bubble. Lamenting on the rottenness of the Nigerian capital market,

Olawale (2010) an investment analyst, accused that "Banks simply issued new shares and lent

money to their customers to invest in those same banks' shares. Moreover, the banks would

simply use depositors' money to invest in those shares, thereby creating artificial robustness

in the market". They (banks) lent millions to their staff and coerced them sometimes against

their wish to invest in the banks own shares. March 2008, a rumor that the central bank and

Securities and Exchange Commission (SEC) had ordered banks to stop making loans to

stockbrokers for margin trading led to a 15 percent fall in three month (John Udonsak,

vanguard newspaper; 16 march 2008) indicating how fragile the market's foundations were.

Investors were shaken, stock prices sank and liquidity from margin lending evaporated.

Part of the causes for the present crisis is that a lot of Nigerian stock brokers were stuck with

the loans and the banks with liquidity problems, while certain chief executives of some banks

became richer than their banks. Thus even without the global downturn, even without the

alleged repatriation of foreign funds, the Nigerian Stock Market was inflated, artificial; the

correction would have been as shocking and painful. The artificial boom led to a burst.

2.3.8 MANIFESTATIONS OF THE CRISIS

Prior to august 6, 2008, which was the scheduled date for the council of the Nigerian

Stock Exchange to elect the next president to take over from the outgoing Chief Oba

Otudeko, forces from the inner caucus of the stock exchange were scheming to frustrate

Alhaji Aliko Dangote's bid to become the head of the exchange. According to Okezie (in

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Guardian newspaper), public perception of Dangote was poor due to his alleged involvement

in AP's share price manipulation Saga. To boost investors' confidence in the face of the above

allegation, some people were thus bent on preventing Dangote from becoming the President.

However, Dangote emerged the president of the Nigerian Stock Exchange because the

exchange has a laid down rules and regulations similar to that of Institute of Directors (IoD)

for electing next president (NSE monthly newsletter, 2009).

According to the NSE rules pertaining to the selection of a president, the first vice-

president to the outgoing president is always elected the president except there is a major

development of statutory reasons to set this procedure aside (NSE 2009).

According to Kingsley (in Guardian, Wednesday, August 18, 2010), an obvious

manifestation of the rots in the NSE occurred when SEC suspended Nova finance securities

on March 26, 2009, after investigations uncovered unethical practices of insider trading.

According to him, the investigation triggered another probe into Afribank Registrars; accused

of aiding and abetting the unethical practices by Nova finance securities. In the same vein,

Ben (2010) argued that "though the suspension and fine of Nova finances and securities may

not be evidence of the guilt of AfriBank registrars but it suggested evidence of complicity of

the group of Dangote consortium partners in masterminding the fraud".

Dangote and Nova with the assistance of Afribank registrars were said to have

swapped a total volume of 500,000 units of irredeemable non-cumulative convertible

preference shares in 10 different transactions, which were admitted to the daily official loss

of the Nigerian Stock Exchange. In reacting to this situation, Femi Otedota, the owner of

African Petroleum(AP) in an interview granted to Vanguard Newspaper( September 26,

2009) said "the ensuring panic and loss of shares values created a scary scenario for AP

investors. The result was that shareholders lost confidence in AP shares, leading to massive

exodus of existing shareholders, who hurriedly offloaded their AP shares thus precipitating a

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sharp decline in its price". It is therefore evidenced by Dangote's ascender to presidency of

NSE that not even the AP share saga could stop him from being elected. But in a twist of fate,

the euphoria that followed his landslide victory at the NSE election was cut short by the

federal high court in Lagos, which nullified the election; shareholders of African petroleum

plc. The shareholders had sued Dangote, Nova Finance and Securities Limited NSE and

others over alleged massive manipulation of AP shares.

According to Ndukauba (2010; 9) an official of Afrinvest Nigeria, "the court cases

that trailed Dangote's presidency and the nullification of his election as the president and

chairman of the council of NSE brought humiliating experiences and trauma to the then

Director General (DG), Okereke Onyiuke that she and her management team decided to

subtly distance themselves form Dangote and avoided him whenever he visited the

exchange". This, according to him, "piqued Dangote, who, with his financial influence got

some close associates of Okereke-Onyiuke to his side and started to gather incriminating

information form the exchange with which he petitioned SEC, alleging that the exchange was

insolvent. The disagreement within the NSE council is believed to be connected with Prof.

Okereke Onyiuke and some council members' argument that it was better for Dangote to

"step aside" while defending himself in court. Dangote, according to Boniface Keizer (2010;

45) rejected the proposal. Instead, in a swift reaction, Dangote in his petition accused the

management of the NSE of misappropriating over N11 billion between 2007 and 2008. In the

petition to the SEC, Dangote alleged that the billions spent in the period, Okereke Onyiuke

used N4.2 billion to "develop the market". The expenditures being questioned by Dangote

include theN450 million for international travels, N125 million on business and local trips,

N70 million on trips to Abuja, N980 million for personnel training, and others (the Guardian,

Friday August 6, 2010).

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2.3.9 NSE CRISIS: RESPONSE AND MANAGEMENT

The government regulator of the Nigerian capital market is the Securities and

Exchange Commission (SEC). It derives its legal muscle form the investments and Securities

Act of 1999 (ISA) and has as its major functions the following: Investor protection thereby

enhancing their confidence in the capital market; ensuring of orderly and equitable dealings

insecurities business and Promotion of capital market growth and development. Okereke

(2002) opines that in designing a regulatory framework, a delicate balance have to be struck

between allowing the market sufficient room to carry out its functions while at the same time

ensuring that practices that impinge the integrity of the market are prohibited. In the wake of

the crisis in the NSE and carrying out its oversight regulatory functions, SEC on Wednesday

August 4, 2010, announced the removal of the Director General of the NSE, Okereke-

Onyiuke and directed Dangote to cease acting as president of the council, in line with a

subsisting court order, pending the final out come of the litigation, according to SEC's

spokesman, Mr. Lanre (in The Nation Friday, August 6, 2010), "these decisions were taken in

the public interest to protect investors in the market in line with the investment and securities

act (ISA) 2007. He added that the SEC had become concerned about recent development in

the NSE, particularly inadequate oversight litigations resulting form boardroom succession

squabbles, allegations of financial mismanagement, governance challenges, and delay in

implementing the succession plan of the exchange carefully weighing the implications of

direct intervention in the affairs of the exchange on the market against the more compelling

goals of safeguarding the public interest and investors. The SEC hopes that its actions will

reinforce the integrity of the markets, demonstrate its commitment to accountability and

boost the confidence of the general public in its ability to step in decisively when necessary".

Collins (2010; 3). Many reactions have trailed the SEC's response to the crisis. National

coordinator of Proactive Shareholders Association of Nigeria (PSAN), Oderinde Taiwo said

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that "it is too early to draw conclusions, adding that external auditors should be allowed to

look at NSE's finances". He also argued that Dangote's motive is highly suspicious; pointing

out that it is not unconnected with the court case instituted by shareholders against the

election of Dangote as NSE president. On the other hand, a founding member of the

Shareholders Solidarity Association (SSA), Gbadebo Olatokunbo believes the investors

would benefit from the turn of event. According to him, the unfolding scenario is capable of

lifting investor's confidence in the market (Nwabueze; Newswatch, 2010)

Similarly, Ndukauba (2010; 9) said that "the SEC had done the right thing so that

market confidence will be sustained". Kingsley Okon of BGL securities, however, said that

nothing really has exchanged. According to him, whoever becomes the director general of

NSE will not change things much. "The management of the exchange is not responsible for

what happens in the market in terms of market performance. It is the performance of the

individual companies in the market that constitute the true state admitted that what the

management of SEC does is to ensure that the operating environment runs according the

stipulated rules and regulations.

Already, some stakeholders have called on the economic and financial crimes

commission (EFCC) to wade into the matter as part of strategies to ensure a thorough job is

done. For example a Lagos based economist, Dr. Mike R. Ogie during a seminar presentation

in Enugu, said that the EFCC and other security agencies must not wait to be invited before

"taking the bull by the horn". He added that in other parts of the world especially in the

developed societies, similar issues are given urgent attention because of their ability to harm

the larger economy.

According to him, "the stock exchange is the heart of any economy for a privileged

insider to allege fraud in the manner that Dangote has done speaks volume".

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2.3.10 IMPACT OF THE CRISIS ON THE NIGERIA CAPITAL MARKET

Basically, the imbroglio in the Nigerian stock exchange has had far reaching impact in

the Nigerian capital market. The impact of the crisis in the capital market is both of positive

and negative one.

In the positive sense, the shake up in the Nigerian stock exchange was necessary for

the protection and safeguard of investors' interests. According to Larne (2010), "investors

would benefit from the turn of event because the unfolding scenario is capable of lifting

investor’s confidence in the market since it is to protect their investments. Another positive

impact of the crisis is its ability to educate investors and the general public on the state of

affairs in the market. No doubt the turn of events in the capital market is not palatable with

investors and the economy at large, but it has a positive impact on how investors should

approach the capital market. It is obvious from the unfolding events, that most investors and

stockbrokers approach the Nigerian capital market as though it were money market.

They invest and hope to reap 100% return in few months time. Their desire to reap in

a short-term motivated then to engage in high speculations which invariably influenced stock

prices. The timely sanction of the management of the NSE by the SEC is a positive pointer

that the regulatory body is not oblivion of sharp practices in the capital market. This is in

tandem to her promises when she took over as DG of SEC. Barely a month after she assumed

office as the Director General of SEC, Ms. Arunma Oteh, "promised tougher sanctions for

anyone who infringes on capital market regulations. She stressed her determination to

eliminate sharp practices, deter malpractice and change behaviors by ensuring that both the

institutional and personal costs of any wrongdoing are extremely high". In an interview

granted to Daily Sun on Monday, August 23, 2010, the president of chartered institute of

bankers of Nigeria (CBN), Laoye Jaiye Ola pointed out that the sack of the NSE management

was necessary to engender accountability and transparency in the market. He said "a lot of

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people believe that all is not well with the NSE's accounts. The only way for the management

of the exchange to redeem its reputation and that of the market is to allow external auditors".

However, the negative impact of the crisis is more far reaching than the positive effect. The

question of investors' confidence in the market is in doubt as investors are gradually pulling

off their investment from the market.

According to a former governor in Ogun State, Olusegun Osoba, the hundreds of

millions of naira he sank on stocks had all gone down the drain. His regrets: "if I had known

it would be like this, I would have stuck to my strategy of buying property. I was persuaded

into it and it hit me hard. You can imagine when First Bank went from N48 to N13. Then

Access Bank went from N20 to N3".

According to Mr. Oladipo Williams, immediate past president of Chartered Institute

of Stockbrokers (CIS), "there is considerable loss of confidence by the generality of investors

which invariably causes low patronage in the market" As reported in Business World of

Monday August 16, 2010, "investors believe that the massive movement of security

operatives into the financial sector at any time of change instills fear in them and creates an

impression of insecurity".

Dr. Prosper Ahworegbe, a medical director/shareholder, said "the sack had

discouraged him and his friends from investing in the market for now because according to

him, he has suffered enough losses and sleepless rights over the crisis." As a result of loss of

investor's confidence in the market, the all share index depreciated by 105.39 points or 0.4

percent to close on Friday, August 6, 2010 at 25,738.79. Market capitalization lose lower at

N6.3 trillion (from N15 trillion). The table below represents the impact of loss of investor's

confidence in the market Nigerian capital.

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Date Share index No of deals Volume of shares Value of shares Market capitalization

2/8/10 25634.39 5997 193.3m #3billion #6269trillion

3/8/10 25418.84 6804 266.2m 1.2b #6216trillion

4/8/10 25691.30 3469 266.2m 925.8b #6283trillion

5/8/10 25715.39 1882 129.1m 639.4b #6289trillion

6/8/10 25738.79 6394 184.4m 2.6b #6294trillion

9/8/10 25606.09 8895 201.1m 1.8b #6262trillion

11/8/10 25032.09 6558 259.8m 1.4b #6121trillion

12/8/10 24988.03 5208 114.2m 3.2b #6100trillion

13/8/10 25984.80 6092 145.2m 2.3b #6110trillion

16/8/10 25156.46 5819 445m 2.9b #6152trillion

17/8/10 25170.02 6285 263m 2.1b #6155trillion

20/8/10 25106.89 6054 292.5m 1.6b #6140trillion

23/8/10 25321.06 5680 195.1m 1.6b #6108trillion

27/8/10 24274.50 6550 227.9 2.1b #5937trillion

Source: Lead capital daily market report. (August 2010).

From the above data, it is clear the loss of investors confidence has struck the market,

reducing the market capitalization from N15 trillion to N6 trillion. Beyond investors'

confidence, however, the stock market is characterized by its volatility. What exactly causes

its rises and falls has several explanations. Some of them are obvious whereas others are not

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so easily determined. Most of the market movers are economic, political and societal

character.

According to Hulbert (2008;37), some of the factors that cause movement in the stock

market have long term effects while the influences of others are felt only in the short-term.

Some of the easily determined market movers include: (a) inflations (b) earnings (c) interest

rates (d) domestic political run out (e) terrorism and times of war (f) oil and energy prices (g)

crime and fraud (h) uncertainty. Numbers (g) and (i) play an extreme role and could

adversely affect investors' confidence.

Insider dealing is another practice that erodes market confidence. According to

Evelyn-Oputa (2009), insider dealings take various forms, but in a typical case, shares of the

company in which the insiders are interested are quickly and discreetly acquired in order to

keep from driving up the price whilst shares are being purchased. This could be achieved by

deliberately spreading inaccuracies and misstatement about the firm. Upon the completions of

acquisition of the desired level of the interested shares, favorable information about the

company is circulated to instigate naive investors into purchasing the same shares therefore

bidding up their prices. When the price has reached a high enough level, the accumulated

holdings are liquidated for huge profits. Such illegal practices not only shatter confidence of

clients and investors on the fairness of the capital market, but also have far-reaching

repercussions for the growth of the economy.

In all instances, the beneficiaries of insider dealings are either professional market

participants, their clients in the illegal trading activities and/or institutions trading for their

own account. Oladayo (2009; 18) argues that the motivation for insider dealings is always the

same: greed and the desire to make huge profits on the basis of privileged information.

Conversely, the losers are investors, whose decisions are affected by this misappropriation of

non – public information; the capital market, whose credibility is affected by the breach of

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trust and confidence and the economy as its growth is stunted by this disruption of the capital

information process.

2.3.11 OTHER IMPACT OF THE CRISIS ON THE CAPITAL MARKET

According to Oba Ekiran (1999; 12) in Chuke Nwude (2003; 402), the importance of

capital market to a country's economy could be felt under the following points:

1. Provision of market facilities and encouragement for the surplus units to pass their savings

to deficit units on the understating that the market infrastructure is in place; qualified and

certified operators are available; regulators are there to blow the whistle wherever there are

infringements that violate the rules of fairness, commercial honor and integrity.

By the above, the crisis in the NSE being the trading floor of the capital market will

definitely affect the role of fund transfer from surplus units to deficit units which generally

may stunt national development

2. Capital formation to augment working capital, project finance, plant expansion or

refurbishment or upgrading information technology.

The above role of capital formation will be challenged when there is a question mark

on the integrity of the management of the NSE. This argument is readily buttressed with the

dismal fall in market capitalization form N15 trillion in 2008 to N6 trillion as soon as the

crisis started.

3. A barometer for measuring the performance of the economy to find out whether the

economy is growing, stagnated or declining. This can be gauged using the market

capitalization number of participants and quantum of funds flow and instruments.

By this it is therefore evidenced that the sharp fall in the market capitalization,

number of deals and the all share index is as a result of the NSE crisis.

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It can be observed form the points highlighted above that it is not an overstatement to

say that a healthy capital market is a catalyst to a country's economic survival and

development (Nwude, 2003). The motivating factors for investment in the capital market can

be returns in form of dividend, interest, capital appreciation, membership of board of

directors for control of an enterprise and to forestall fund idleness to take advantage of time

value of money. Therefore, any attempt to allow crisis in the exchange will have far -reaching

repercussion on the investors' confidence and the economy as a whole.

2.3.12 Performance of the Nigerian Capital Markets

The Nigerian Stock Exchange has performed exceptionally well in recent times. Many

investors link this to the successful recapitalization of the Nigerian Banks in 2005, which was

initiated by the Central Bank of Nigeria. The Exchange now experience border listings and

transactions, high influx of foreign investments and investors and is adjudged to be one of or

possibly the fastest growing Exchange in the world. It boasts of over 10 million

shareholders/investors (www.nigerianstockexchange).

The Nigeria Stock Exchange All share Index in (1984) was 6992.10 at end 1996 and

8561.39 at end March 1997. During 1998, foreign investors spent a total of 4.2 billion naira

on the share of quoted companies in Nigeria, a 426% improvement over the previous year. In

turnover terms, a total of 1.9 billion shares worth 12.6 billion were traded at the end of

November 1998, in contrast to 1.36 billion shares valued at 11 billion naira traded on the

exchange over the whole of 1997. The new issues market performed well, with approval

granted to 32 companies to issue fresh securities worth 15.9 billion naira

(www.mbendi.com/exch/16/ p00. 5. htm).

Stock Market Legislations

Transactions in the stock market are guided by the following legislations, among

these are: Investments and securities Decree No 45 1999, Companies and Allied Matters

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Decree 1990, Nigeria Investment Promotion Commission Decree 1995, Foreign Exchange

(miscellaneous provisions) Decree 1995. Transactions on the Exchange are regulated by the

Nigerian Stock Exchange, as a self-regulatory organization (SEC) it also administer the

investments and securities Decree 1999. Following the deregulation of the capital market in

1993, the Federal Government in 1995 internationalized the capital market, with the

abrogation of the laws that constrained foreign participation in the Nigerian capital market.

Consequent upon the abrogation of the Exchange control Act 1962 and the Nigerian

Enterprises Promotion Decree 1989, foreigners can now participate in the Nigerian capital

market both as operators and investors. Also, there are no limits any more to the percentage

of foreign holding in any company registered in the country

(www.nigerianstockexchange.com/the exchange.htm).

Money Market & Bond Nigeria Interbank Offer Rate

The Interbank rate dropped in the month of April 09 as the CBN's measures aimed at

addressing the liquidity constraint impacted on the financial sector. The 7-day Nigerian Inter-

Bank Offer Rate (NIBOR) at the inter-bank market transactions came down to close the

month at 14.79%, a 353 basis point decrease from the previous month's close. The 90-day

NIBOR also came down to close the month at17.04% a 1031 basis point increase from the

previous month's close.

Table 2.2: Nigerian Interbank Offer Rate

Tenor 31 -Mar-O9 30-Apri-O9 %Change

Call 13.9583 13.4167 -3.88

7 Day 15.3333 14.7917 -3.53

30 Day 18.9583 16.5 -12.97 60 Day 19 17.0417 -10.31

90 Day 19 17.3333 -8.77

180 Day 19.4167 17.9583 -7.51

365 Day 19.8333 18.375 -7.35

Source: Money Market Association of Nigeria

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Open Buy Back

OBB, a discountable security traded in the Nigerian Inter-bank financial market which

was 9.04% and 9% for banks and discount houses respectively was 7.17% for banks and 7%

at the end of the month.

Table 2.3: Open Buy Back

Open Buy Back 31-Mar-O9 3O-Apr-09 %change

Bank 9.0417 7.1667 -20.73

Dis. Houses 9 7.0000 -22.22

Source: Money Market Association of Nigeria

Naira Remains Relatively Stable

CBN's effort to return stability to the market reintroduced the Retail Dutch Auction

System (RDAS) in January, 2009, ostensibly to check frivolous demand for foreign exchange

(forex), which gives room for speculation. Under Wholesale Dutch Auction System (WDAS),

banks were not expected to submit documentations entailing what their clients would use the

foreign exchange for, but under the new system of RDAS, banks are now expected to bid

along with documentations containing what foreign exchange being sourced would be used

for in terms of importation. The Retail Dutch Auction Sessions was conducted on a daily

basis from March 18, 2009 instead of twice weekly (Mondays and Wednesdays). Procedures

and deadlines to submit bid instructions remain unchanged. The naira remained relatively

stable in the month of April.

Table 2.4: Exchange Rates

Currency 31-Mar-09 30-Apr-09 %change

Euro 193.5081 193.2512 -0.13

Ponds 207.9119 215.5700 -3.68

USD 145.2000 144.9000 -0.21

Yen 1.4732 1.4795 0.43

Source: Central Bank of Nigeria

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Table 2.5: Swap and Forward Quotes NIFEX (Closing- 31March 20O9)

Forward Swap Forward Quotes

Tenor Bid/Offer Tenor Bid/Offer

30 Days 2.1277/2.1291 30 Days 50.7527/150.8541

60 Days 4.2539/4.2567 60 Days 152.8789.152.9817

90 Days 6.3785/6.3827 90 Days 155.0035/ 155.1077

180 Days 12.7429/12.7515 180Days 161.3679/161.4765

Source: Money Market Association of Nigeria

Table 2.6: Spot NIFEX

09-Apr. 09 30-Apr-09 %Naira Dollar Movement

BID (N/$) 145.8000 145.9000 0.07

Offer (N/$) 148.7160 148.8180 0.07

Source: Money Market Association of Nigeria

Table 2.7: Retail Dutch auction System

Number of Bans Amount Offered Amount sold Date

22 $100,000,000 148,651,772.40 9-Apr-09

21 $100,000,000 155,332,703.46 28-Apr-09

19 $100,000,000 81,686,770.26 27-Apr-09

24 $100,000,000 150,422,381.00 24-Apr-09

22 $100,000,000 228,626,706.68 23-Apr-09

24 $100,000,000 282,163,061.06 22-Apr-09

24 $100,000,000 217,515,195.78 21-Apr-09

20 $100,000,000 130,667,059.59 20-Apr-09

23 $100,000,000 118,784,858.18 17-Apr-09

21 $100,000,000 95,316,782.26 16-Apr-09 23 $100,000,000 162,201,516.44 15-Apr-09

23 $100,000,000 136,115,843.71 14-Apr-09

23 $100,000,000 94,159,483.45 09-Apr-09

24 $100,000,000 188,268,733.99 08-Apr-09

23 $100,000,000 167,236,667.46 07-Apr-09

22 $100,000,000 67,268,951.87 06-Apr-09

21 $100,000,000 148,372,320.15 03-Apr-09 19 $100,000,000 70,958,508.04 01-Apr-09

20 $100,000,000 88,000,907.15 01-Apr-09

Source: Central Bank of Nigeria

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Treasury Bills

Table 2.8: Treasury Bill Rate

Tenor Rate 31/03/2009 Rate 28/04/2009 (%) Change

1 Month 0.560-3 1.111 98.29

2 Month 2.5967 2.9822 14.85

3 Month 2.6114 3.1920 22.23

6 Month 2.6336 3.8340 45.58

9 Month 2.6505 4.1748 57.51

12 Month 2.6683 4.2470 59.17

Source: Money Market Association of Nigeria

Matured Bills

Table 2.9: PMA

Tenor Amount (N’bn) Rate Date

182 Day 10,000.00 9.3 2-Apr-09

182 Day 10,556,57 9.0 9-Apr-09

182 Day 10,799.68 8.5 16-Apr-09

182 Day 10,799.68 7.74 23-Apr-09

91 Day 10,110.45 2.34 30-Apr-09

182 Day 10,000.00 2.85 30-Apr-09

Source: Money Market Association of Nigeria

Open Market Operation (OMO)

Table 2.10: OMO

Tenor Amount N’(Bn) Rate Date

262 Day 2,000.00 9.75 9-Apr-09

272 Day 2,000.00 9.55 9-Apr-09

279 Day 2,000.00 9.75 9-Apr-09

281 Day 10,000.00 9.55 9-Apr-09

281 Day 8,000.00 9.55 9-Apr-09

282 Day 10,000.00 9.55 9-Apr-09

283 Day 5,000.00 9.52 9-Apr-09

90 Day 20,286.68 2.00 30-Apr-09

Source: Money Market Association of Nigeria.

Commodity Prices

In the month of April, oil prices recorded some volatility starting the month at

$47.15/barrel and ending at $50/barrel. The Secretary general of OPEC Abdullah Al-Badir at

a press conference in April said the world economic outlook will decide whether OPEC will

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reduces its production at its next meeting in Vienna in May. OPEC will take steps toward

stability in oil markets if the cartel members deem it necessary.

Mobilization of resources for national development has long been the central focus of

development economists. As a result of this, the centrality of savings and investment in

economic growth has been given considerable attention in the literature (Rostow, 1960;

Malivaud, 1979; Soyode, 1990; Samuel, 1996; Demirguc-Kut and Levine (1996). For

sustainable growth and development, funds must be effectively mobilized and allocated to

enable business and the economy harnessed their human, material and management resources

for optimal output. The capital market is an economic institution, which promotes efficiency

in capital formation and allocation. The capital market enables government and industry to

raise long-term capital for financing new projects and expanding and modernizing

industrial/commercial concerns. If capital resources are not provided to those economic areas,

especially industries where demand is growing and which is capable of increasing production

and productivity, the rate of expansion of the economy often suffers. A unique benefit of the

capital market to corporate entities is the provision of long-term, non-debt financial capital.

Through the issuance of equity securities, companies acquire perpetual capital for

development. Through the provision of equity capital the market also enables companies to

avoid over-reliance on debt financing thus improving corporate debt-to-equity ratio.

The existing literature clearly shows that developed economies had explored the two

channels, through which resources mobilization affects economic growth and development -

money and capital markets (Samuel, 1996; Demirguc-Kut and Levine, 1996). This is

however, not the case in developing economies where emphasis was placed on money market

with little/consideration for capital market (Nyong, 1997).

Since the introduction of Structural Adjustment Program (SAP) in Nigeria, the

country's capital market has grown very significantly (Alile, 1996; Soyode, (1990). This is as

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a result of deregulation of the financial sector and the privatization exercises, which exposed

investors and companies to the significance of the capital market. Equity financing became

one of the cheapest and flexible sources of finance from the/capital market and remain a

critical element in the sustainable development of the economy (Okereke-Onyiuke, 2000).

Though capital market is growing; it is however characterized by complexities. The

complexities arise from trends in globalization and increased variety of new instrument being

traded; equity options, derivatives of various forms, index futures etc. However, the capital

objectives of the capital market worldwide remain the maintenance of the efficient market

with attendant benefit of economic growth (Alile), (1997).

The link between capital market performance and economic growth has often

generated strong controversy among analysts based on their study of develop and emerging

markets (Samuel, 1998; Demirguc-Kut and Levine, 1996; Akimifesi, 1987; Levine and

Zervos, 1990; Obadan, 1998; Onosode, 1998; Emenuga, 1998; Osinubi, 1998). According to

Nyong (1997) the financial structure of a firm, that is, the mix of debt and equity financing,

change as economies develop. The tilt is however, more towards equity financing through the

capital market.

As economics develop, more funds are needed to meet the rapid expansion. The

capital market serves as a veritable tool in the mobilization and allocation of savings, among

competing ones which are critical to the growth and efficiency of the economy (Alile, 1984).

The determination of the overall growth for an economy depends on how efficiently

the capital market performs its allocation functions of capital. As the capital market mobilizes

savings, concurrently it allocates a larger proportion of it to the firms with relatively high

prospects as indicated by its rate of returns and level of risk. The importance of this function

is that resources are channeled by the mechanism of the forces of demand and supply to those

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firms with relatively high increasing productivity thus enhancing economic expansion and

growth (Alile, 1997).

2.3.13 Capital Market and Economic Growth of countries

In recent times there was a growing concern on the role of capital market in economic

growth ('Levine and Zervos. 1996) Oyejide 1994: Nyong 1997; Obadan, 1998; Onosode,

1998, Osinubi, 1998). The capital market is in the focus of the economist and policy makers

because of the perceived benefits it provides for the economy. The stock market provides the

fulcrum for capital market activities and it is often cited as a barometer of business direction.

An active stock market may be relied upon to measure changes in the general economic

activities using the stock market index (Obadan, 1995).

The capital market is viewed as a complex institution imbued with inherent

mechanism through which long-term funds of the major sectors of the economy comprising

households firms and government are mobilized, harnessed and made available to various

sectors of the economy (Nyong. 1997). The development of the capital market provides

opportunities for greater funds mobilization, improved efficiency in resource allocation and

provision of relevant information for appraisal (Inanga and Emenuga 1997).

There is a boom in the developed and emerging capital market with a substantial part

of the growth accounted for by the emerging market. The reasons adduced for this are that:

one, investing firms enjoy lower cost of equity when the stock market functions efficiently;

two, the opportunity to trade securities and also hedge allows for relative reduction in risk;

three, the ability of the market to adjust share prices almost instantaneously imposes control

on the investment behavior of firms; and lastly, countries that are desirous of foreign

investments are able to secure it through the stock exchange (Demirguc-Kunt and Levine

1996).

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Capital market contributes to economic growth through the specific services it

performs either directly or indirectly. Notable among the functions of the capital market are

mobilization of savings, creation of liquidity, risk diversification, improved dissemination

and acquisition of information and enhanced incentive for corporate control. Improving the

efficiency and effectiveness of these functions, through prompt delivery of their services can

augment the rate of economic growth.

At any stage of a nation's development, both the government and the private sectors

would require long-term capital. For instance, companies would need to build new factories,

expand existing ones, or buy new machinery. Government would also require funds for the

provision of infrastructures. All these activities require long-term capital, which is provided

by a well functioning capital market.

Capital market may also affect economic activities through the creation of liquidity.

Liquid equity market makes available savings for profitable investment that requires long-

term commitment of capital. Hitherto: investors are often reluctant to relinquish control of

their savings for long periods. As asserted by Bencivenga Smith and Starr (1996), “without

liquid capital market there would be no industrial revolution”. This is because savers -would

be less willing to invest in large, long-term projects that characterized the early phase of

industrial revolution.

Closely related to liquidity is the function of risk diversification. Capital markets can

affect economic growth when they are internationally integrated. This enables greater

economic risk sharing. Because high return projects also tend to be comparatively risky.

Capital markets that facilitate risk diversification encourage a shift to higher –return projects

(Obstfeld, 1994). The resultant effect is a boost in the economy leading to growth through the

shifting of society’s savings to higher-return investments.

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Accelerated economic growth may also result to acquire information about firms.

Rewards often come to an investor able to trade on information, obtained by effective

monitoring of firms for profit. Thus, improved information will improve resource .allocation

and promote economic growth.

The nature and economic significance of the relationship between capital market

development and growth vary according to a country's level of economic development with a

.larger impact in less developed economies (Filler. Hanousek and Campos.1999). The

proponents of positive relationships between capital market development and economic

growth hinged their argument on the fact that the capital market aids economic growth and

development through the mobilization and allocation of savings, risk diversification, liquidity

creating, ability and corporate governance improvement among others Nyong (1997) reported

that as far back as 1969 Goldsmith Raymond observed that the emergence of equity

markets and its rapid development indicate the level of economic growth and development.

Using the liquidity argument, Bencivenga, Smith and Starr (1996) reasoned that the

level of economic activities is affected by the capital market through its liquidity creating

ability. The logic of this reasoning is that profitable investment requires long-term capital

commitment; often investors are not willing or are reluctant to trade their savings for a long

gestation period. With liquid equity markets, risks associated with investment are reduced

making it more attractive to investors. Thus, the easy transfer of capital ownership facilitates

film’s permanent access to capital raised through equity issues. Therefore, as liquid market

improves the allocation of capital, the prospect for long-term economic growth is enhanced.

Also, savings and investment are increased due to reduction in the riskiness of investment

facilitated by capital market liquidity.

However, an alternative view on capital market and long-term economic growth by

Demirgic-Kunt and .Levine (1996) observed that there are some channels through which

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liquidity can deter growth: Firstly, savings rate may be reduced, this happens when there is

increasing returns on investment through income and substitution effect. As saving rate falls

and with the existence of externality attached to capital accumulation, greater capital market

liquidity could slow down economic growth. Secondly, reducing uncertainty associated with

investment may impact on savings rate, but the extent and the direction remain ambiguous.

This is because it is a function of the degree of risk-averseness of economic agents. Thirdly,

effective corporate governance often touted as an advantage of liquidity of capital market

may be adversely affected. The ease with which equity can be disposed off may weaken

investors' commitment. This may serve as a disincentive to corporate, control and vigilance

on the part of investors thereby negating their role of monitoring firm's performance. This

often culminates in stalling economic growth.

Edo (1995) asserts that securities investment is a veritable medium of transforming

savings into economic growth and development and that a notable feature of economic

development in Nigeria since independence is the expansion of the capital market thereby

facilitating the trading in stock and shares. Osinubi (1998) reported that Harry Johnson in

1990 recognized that one of the conditions of being developed is having a large stock of

capital per head, which must always be replaced and replenished when used up. Where this is

lacking the condition of being under developed prevails.

The Structural Adjustment Program (SAP) promoted by the World Bank and the

International Monetary Fund, embarked upon by the developing countries, according to

Soyode (1990) emphasized that self-sustained growth process requires substantial investible

resources, which are readily available at the capital market.

2.3.14 Characteristics of the Nigerian Stock Market

Stock market development can be categorized using three main characteristics:

traditional, institutional and asset pricing (Demirgue-Kunt and Levine, 1996). Traditional

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characteristics are concerned with basic growth measures of stock market. These measures

include number of listed companies and market capitalization. There are also the institutional

characteristics measures. These institutional characteristics measures are the regulatory and

legal role that may influence functioning of the market, information disclosure and

transparency requirements as well as market barriers and trading costs. Lastly, the Asset

Pricing characteristics measures focus on the efficiency of the market especially in relation to

the pricing of risk.

Traditional Characteristics

Market size

With 269 securities listed and a market capitalization of approximately 300 billion or

US 3,000 million, relatively to international standards, the Nigerian Stock Exchange can still

be regarded as small. In Africa, Nigerian ranked 4th after South Africa, Egypt and Morocco in

term of market size (Standard and Poor’s Emerging Stock Markets Factbook, 2000). Among

the emerging markets, Nigeria’s share of emerging market capitalization out of 54 markets

covered by Standard and Poor’s was just 0.1% as at the end of 1999 (Standard and Poor’s

Emerging Stock Markets Factbooks, 2000).

Alile and Anao, (1986) adduced possible reasons for the small size. One of the

reasons is that indigenous entrepreneurs were not too keen in going public due to fear of

losing control. However, an innovative move by the stock market through the creation of

second-tier securities market (SSM) tried to find solution to the problem. Measures taken by

the governments and the exchange itself are expected to boost the resource base of the stock

market in Nigeria. These measures are; Privatization of Public Enterprises, linking up of the

exchange with Reuters Electronic Contributors System for on line global dissemination of

stock information, launching of the exchange’s Intranets System (CAPNET) and the

transition of the exchange from manual call-over, Trading System to Automated System

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(ATS) in April 1999. It is also expected that the present democratic dispensation will impact

positively on the turnover of the exchange.

Liquidity

Basically, liquidity refers to the ease with which an asset (in this case security) can be

turned into cash through an efficient market. That is, the ability to easily buy and sell

securities. Demirgue-Kunt and Levine (1996) identified two main reasons why liquidity is

important in the characterization of stock market. The first is that liquidity relates to the

riskiness of the investment. An investment is deemed to be less risky where investors are able

to alter their portfolios quickly and cheaply. While the second, theoretically, allocation of

capital is more efficient and as such liquid market enhances long-term economic growth.

Added to the points above Osinubi (1998) pointed out that liquidity of the stock market

facilitates profitable interaction between the stock market and the money market in that

shares become easily acceptable is collateral for bank lending thereby boosting credit and

investment.

There are two main measures of liquidity; total value traded ratio and turnover ratio.

Total-value traded ratio is the total value of shares traded on the stock market exchange

divided by GDP. It measures trading of equities as a share of national output. Normally, it

should positively reflect liquidity on an economy wide basis. The market has an average of

0.25 per annum for the study period.

Turnover ratio is the value of total shares divided by capitalization. High turnover

reflects low transaction costs. The Nigerian stock market turnover ratio for the period under

study has an average of 0.04. These two main measures are set out in column 6 and 7 of the

table.

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Institutional Characteristics

a. Regulatory Institutions

Regulation is seen as a way of buoying investor’s confidence in brokers and other

capital intermediaries and stakeholders. It ensures fair play and transparency in the market

operations. This is turn encourages investment and trading in the stock market. Nigerian

capital market had from the onset ensured that a strong institutional framework was in place

through the establishment of Capital Issue Commission (though with no legal status), which

later metamorphosed, to Nigeria Securities and Exchange Commission in 1979 and serves as

the apex regulatory body of Nigerian capital market. Of added importance is that the Nigerian

Stock Exchange itself is a self-regulatory institution (Akamiokhor, 1984; Inanga and

Emenuga, 1997).

b. Transaction Costs

One of the relative measures of the efficiency of a stock market is the level of

transaction cost. The higher the transaction cost the highly inefficient the market is perceived

to be. Transaction cost can either by viewed from the perspective of an investor or that of the

companies. From a company’s point of view, it includes all expenses incurred in the bid to

make public offer of equity or loan stock. For an investor on the other hand, transaction cost

comprises all expenses incurred in the purchase of shares of loans stock. Identifiable

transaction cost in Nigerian capital market includes: application fee (0.5%), valuation fee

(0.75%), brokerage fee (1%) and vending fee (1%).

2.3.15 Empirical Studies on the Impact of Stock Market on Economic Growth

Levine and Zervos (1996) examines whether there is a strong empirical association

between stock market development and long-run economic growth. The study used time-

series regression of forty-one countries from 1976 to 1993 to evaluate this association. The

study toe the line of Demirgue-Kunt and Levine (1996) by conglomerating measures such as

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stock market size, liquidity and integration with world markets, into index of stock market

development.

The growth rate of Gross Domestic Product (GDP) per capita was regressed on a

variety of variables designed to control for initial conditions, political stability, investment in

human capital and macroeconomic conditions, and then include the conglomerated index of

stock market development. The finding was that a strong correlation between overall stock

market development and long-run economic growth exist. This means that the result is

consistent with the theories that imply a positive relationship between stock market

development and economic growth.

Efforts were also made by Nyong (1997) to develop an aggregate index on capital

marked development and use it to determine its relationship with long-run economic growth

in Nigeria. The study employed a time series data from 1970 to 1994. For measures of capital

market development the ratio of market capitalization to GDP (in percentage), the ratio of

total value of transactions on the main stock exchange to GDP (in percentage), the value of

equities transaction relative to GDP and listings were used. The four measures were

combined into one overall composite index of capital market development using principal

component analysis. A measure of financial market depth (which is the ratio of broad money

to stock of money to GDP) was also included as control. The result of the study was that

capital market development is negatively and significantly correlated with long-run growth in

Nigeria. The result also showed that there exists bi-directional causality between capital

market development and economic growth.

2.4 GAP IN THE LITERATURE

The mere presence of a capital market in a country boosts the international investment

climate as it raises the chances of additional local financing for both foreign and local direct

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investment. The capital market has provided opportunity for investment diversification. A

large part of wealth currently invested in Nigeria would have been diverted to foreign

countries but for the presence of the capital market. It, therefore, remains a viable institution

for holding back capital flight thereby reducing underdevelopment of the economy.

Despite the capital market’s laudable performance and benefits, it is still beclouded

with some weaknesses in Nigeria. The bureaucratic system of the Securities and Exchange

Commission is a hindrance to the smooth processing of applications submitted to it. The

private sector to which most enterprises belong is not used to this bureaucratic system of the

public sector. The fees charged by the Exchange are unreasonably high and constitute a great

burden on enterprises/companies.

As a result, the harsh operating environment hampered the performance of most

companies. Rising unemployment, weakened purchasing power and the weakened investor

confidence further exerted download pressure on the Capital Market. The impact of the

global economic meltdown worsened the scenario as foreign investors shunned assets

considered risky while local investors sought refuge in short-term securities. Also, the initial

negative reaction to the decision of most banks and insurance companies to make full

provision for their non-performing assets dampened investors’ appetite and slowed down

market recovery. In the long-run, the decision is healthy for the market in the sense that it

would show a true and fair position of the institutions concerned. This study is therefore

aimed at a lucid analysis of these diverse ramifications of the place of the capital market in

the quest for economic development in Nigeria.

2.5 THEORETICAL FRAMEWORK

The theory of privatization is employed in this work. This theory holds that the public

owed enterprises are better managed and serves the purpose for which they are established

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well if they are in the private hands who runs them on profit making basis. The theory

believes that government should provide healthy environment for the corporations while

individuals and co-operative bodies owned and managed them with profit-making as their

major goal. This can be achieved better through the development of the capital market. The

role of capital markets in economic growth suggests that the functioning of equity markets

affects liquidity. By altering the quality of these services, the functioning of capital markets

can alter the rate of economic growth (Raghbendra Jha, 2003)

Demirguc-Kunt and Levine (1996) developed three distinct ways to characterize

capital market development and considered it to be a multifaceted concept involving issues of

market size, liquidity, and integration with world capital markets. They carried out their

research using data from 44 developing countries between the period of 1966 and 1973 which

pointed out that financial structure evolves with economic development and capital market

development is an integral part of this evolution.

Specifically, some literatures that produce a positive relationship between capital

market developments also show a negative effect on growth. In fact, they do not provide a

unique measure of capital market development but they suggest that the market size liquidity

and integration with world capital market may affect economic growth. The specific roles of

capital market in economic growth suggest that the functioning of equity market affect

liquidity, risk diversification, acquisition of information about firms, corporate control and

savings mobilization. By altering a quality of these services, the functioning of capital market

can alter the rate of economic growth. The entire concept of capital market efficiency

comprises three types of efficiencies:

Allocation efficiency: This role of capital market is to allocate scarce savings to productive

investments in a way that benefits everyone.

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Capital efficiency: A market whose intermediation provides the services of channeling fund

savers to investors at a minimum cost that provides a fair return.

Pricing efficiency: A market is efficient when prices are used as signals for capital allocation.

These prices are set by the forces of demand and supply. A market that is price efficient

implies efficiency in the processing of information. The prices of capital assets at anytime are

based on the correct evaluation of all information available.

Tenets of the Theory

One of the fundamental tenets of privatization is that competition improves efficiency.

In the situation, the privatized will need to compete for capital and provide a competitive

return for investors. This pressure will improve efficiency. If a public sector activity is

exposed to the pressure of competition through allowing private firms to bid for it, then

competition will lead to costs savings.

The theoretical notion that guide privatization policy is best started with a definition

of privatization. Leslie Armijo (1999: 170) offers a good definition: “all types and increments

of transfer of ownership, partial or complete, from the government to the private sector.

Privatization also occurs when previously excluded persons or groups, such as foreign

investors or limited liability corporate entities, are re-categorized as eligible 'private' owners”.

When considering privatization, one wants to assure that the forces of competition

will indeed improve the enterprise. If competition is out of the question, private forces can

still guide an enterprise better than the state can, so long as clear and well-designed

regulatory bodies are in place to mitigate rent-seeking behavior. Properly selling the company

continues to reduce the rent-seeking risk and efficiency loss. Furthermore, privatization offers

a nation both domestic and international political advantages as well as micro and macro

level economic improvements.

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Leslie Armijo (1999: 163-168) demonstrates the relevance of privatization in political

economy by dividing its incentives into the economic and the political. On the political side,

one has both domestic and international incentives. Domestic incentives to privatize include

attracting, rewarding or punishing in-state groups and increasing voter support. Better

relations with powerful international organizations such as the World Bank, the International

Monetary Fund and the World Trade Organization and political powerhouses like the United

States and the European Union are the primary international incentives. With regards to

economic incentives, Armijo (1999) names two, the intrinsic and the pragmatic. Intrinsic

incentives are micro level improvements to the SOE itself, such as enhanced management,

resource allocation, reputation, technology, etc. Pragmatic economic incentives apply to the

larger scale, examining how the privatization will affect the economy as a whole. Keeping

these factors in mind, governments then must devise an effective manner for selling their

SOEs.

Application of the Theory to the Study

There is worthy of note, the important issue of the apparent connectedness between

capital market, privatization of public enterprises, and economic growth. Privatization

provides additional listing on the stock market, enlarges equity shares, and injects new life

into the market. The capital market, therefore, speeds up economic growth by facilitating the

restructuring of ownership of one-time public enterprises. These enterprises can now function

appropriately as expected because they now have access to funds raised in the capital market

and are run by profit-seeking individuals. Privatization provides investors with a wider

variety of capital, thereby increasing competition, and the volume of securities and

transactions in the capital market. Increase in transactions and stocks increases the efficiency

of the stock market which in turn boosts GDP growth. Thus, there is no contesting the fact

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that the capital market is a cornerstone in any privatization program Equity; privatization

holds a special place in capital market for three reasons.

First it provides additional listing on the stock market, secondly, the floatation

through privatization helps to inject new life into the market, and thirdly, it gives diversity

and measure of maturity to the capital market. Privatization could thus revitalize the capital

market to a point where it would be efficient.

Therefore, privatization increases the volume of securities and transaction in the

capital market. This provides investment with an extended variety of stocks from which to

choose from firms; on the other hand, to compete with each other to attract the funds of

investors and thus have to increase their efficiency. Therefore, funds will be efficiently

allocated, thus increasing productivity and hence the Gross Domestic Product (GDP).

Privatization has led to an increase in the size of capital markets. The widening of the

ownership base of the capital market through the issuance of public enterprises share to the

public provides a boost to capital market operations. Thus, a wide capital base and efficient

capital market would also boost GDP growth.

2.6 HYPOTHESES

The following hypotheses guided this study:

i. The Nigerian capital market facilitated wealth creation and the provision of long term

funds that engendered national development in Nigeria between 1980 to 2009

ii. Enormous challenges that confronted the Nigeria capital market hindered its

efficiency in mobilizing long term funds for national development in Nigeria from

1980 to 2009

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iii. Measures like privatization of the public enterprises and deregulation of the financial

sector could be employed to enhance the capacity of the Nigerian capital market to

mobilize long term funds for national development in Nigeria.

2.7 OPERATIONALIZATION OF KEY CONCEPT

Under this section of the work, certain key concepts that shall be used repeatedly need

to be defined, and how they are to be applied shall also be clarified for the purpose of proper

understanding of the work. These concepts are as follows:

Security: This is income-yielding and other paper traded on the Stock Exchange or in the

secondary market. An essential characteristic of a security is that it is saleable. The main

types of securities are (a) fixed interest, such as debentures, preferences shares stock and

bond. Bonds include all government securities and local authorities’ securities. Sometimes a

distinction is made between silt-edged securities and other fixed interest securities though in

both cases, the holder normally receives a predetermined and unchanging rate of interest on

the nominal value of the stock, which is what is meant by fixed index.

(b) Variable Interest: This includes ordinary shares

(c) Others: these include bill of exchange, assurance policies, and warrants. Securities

may be redeemable, quoted or unquoted. Quotation includes bonds; equities; gilt-edged

security.

Capital Market: This is a market in which long-term capital is raised by industry and

commerce, the government and local authorities. The money comes from private investors’,

insurance companies, pension funds and banks; and is usually arranged by issuing houses and

merchant banks, stock exchanges are also part of the capital market in that they provide a

market for the shares and loan stock that represent the capital once it has been raised.

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Primary Market: The primary market is a market where assets are sold for the first time.

The Stock Exchange is a primary market if securities are issued for the first time. It is also

known as new issues market.

Secondary Market: This is the one in which existing securities are traded. In most cases, a

stock exchange largely fulfills the role of a secondary market, with the floating of new issues

representing only a small proportion of its total business. It is the existence of flourishing

secondary market providing liquidity and spreading of risks that creates the conditions for

healthy primary market.

Economic Growth: Economics Growth is the increase in a country’s national income or

sometimes, it’s per capital national income. Growth is taken as the basis of advancing human

welfare, although there are problems in the measurement of national income. Moreover,

growth in the national income should not be equated necessarily with growth in welfare. The

process of growth such as industrialization, the expansion of the road network, the

construction of airports, brings discomfort such as pollution, noise and destruction of

countryside amenity as of which are cost that are not subtracted from the statistical measure

of the national income. Nevertheless, explaining the factors that are behind economic growth

in order that more of it can be generated is an important area of Public Administration.

Share Indices: The share index is index numbers indicating changes in the average prices of

shares on the Stock Exchange. The indices are constructed by taking a selection of shares and

‘weighting’ (weighted average) the percentage changes in prices together as an indication of

aggregate movement in share prices. The share index shows Percentage changes in the

market value of a portfolio compared with its value in the base year of the index. Index

numbers are published by several papers and weekly journals, e.g. financial Times share

indices.

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CHAPTER THREE

AREA OF STUDY AND RESEARCH PROCEDURE

3.1 AREA OF STUDY

The Securities and Exchange Commission is the apex regulatory agency for the

Nigerian capital market. Established by SEC Decree 29 of 1988, the Commission has evolved

over the years with its current enabling law, the Investment and Securities Act (ISA) 45 of

1999. The Commission is basically charged with the dual role of developing and regulating

the market. Some of its specific functions as listed in section 8 of the ISA are to:

• Register and regulate Securities Exchanges, Capital Trade Points, Futures, Options

and Derivative Exchanges, Commodity Exchanges and any other Recognized

Investment Exchanges

• Register Securities to be offered for subscription or sale to the public

• Render assistance in all aspects including funding as may be deemed necessary to

promoters and investors wishing to establish Securities Exchange and Capital Trade

Points.

• Facilitate the establishment of a nation-wide system for secondary trading in the

capital market.

In carrying out its developmental role in the market, the Commission has taken

various steps and introduced some measures. For instance, in order to create more awareness

of the opportunities in the market and thereby enhance participation by the populace, SEC

has engaged in public enlightenment campaigns through radio and television programmes,

organizing seminars, workshops and conferences and various publications. It has also, over

the years, sponsored/promoted interactive sessions that are aimed at developing new capital

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market products. It has been sponsoring the introduction of capital market studies at both

secondary and tertiary educational levels.

The mandate to protect investors in the market, to minimize the risk of their becoming

victims of any malpractice is a major objective of the Commission. Consequently, the

Commission has over the years left no stone unturned to ensure that such malpractices are

prevented or minimized. To achieve these objectives, the Commission adopts tested and

proven tools such as:-

i. Registration: Registration is the entry point to the Nigerian Capital Market as it ensures

that only proper and fit persons are admitted to operate in the market and that only

securities for which all pertinent and material information have been provided that

will enable rational investment decisions are allowed to be issued and offered to

investors.

ii. Surveillance: The ISA empowers SEC to maintain surveillance over the securities market

in order to ensure orderliness, fairness and equitable dealings in securities. Hence, the

Commission’s staffs are always present to monitor activities on the floors of the Stock

Exchange as well as to monitor the activities of other operators in the market.

iii. Investigation: The Commission is also empowered by the ISA to embark on the

investigation of any capital market operator as well as any company with regards to

securities issuance. Such investigations may be triggered off by petitions to the

Commission, media reports etc.

iv. Enforcement: The Commission, after investigating and ascertaining the veracity of any

case of malpractice by any market participant may apply sanctions against such

offenders. For instance, registration certificates of erring market operators may be

suspended or the Commission may institute a legal action to enforce compliance.

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v. Rule Making: Pursuant to the ISA the commission makes rules for operating in the

market. Such rules are subject to revision as the need arise.

The Nigerian Stock Exchange (NSE)

The NSE is a self regulatory organization with oversight function on the professional

activities of its member’s i.e. stockbrokers who trade on its floors. The Nigerian Stock

Exchange is required to provide periodic report of its activities to the Securities and

Exchange Commission. Being a non statutory body, its rules, which must be approved by

SEC, lack the force of law.

Enforcement & Compliance

Securities laws and rules are made to be obeyed. Thus, the Commission has a

Compliance Division which ensures that the decisions of its Management on cases of

malpractices in the market as well as its administrative directives are complied with. In the

absence of Enforcement and Compliance actions, rules will be broken with impunity and the

Commission will be a toothless bulldog. Indeed, some of the amendments to be made to the

Investment and Securities Act are intended to enhance the Commission’s power in this

respect. The Commission has in the recent past had to refer some cases to the Economic and

Financial Crimes Commission.

Venture Capital

Venture capitalism is an important method by which the capital market can help develop

a nation’s corporate sector and in turn, its economy. Venture capital is the initial fund or

equity capital made available to a start-up or an already existing company by high net-worth

individuals or institutional investors to foster its growth. It is typically a high risk but high

return investment in new enterprises that may, in the absence of any trace record, be unable to

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otherwise attract funding. Venture capitalists therefore are very important especially in the

development of small and medium sized companies.

Venture capital firms are, important not only for the funds they provide but, perhaps

more so, because they also assist in developing management teams, provide advisory services

and new product ideas, among others. In short, venture capital firms provide a total package

towards ensuring the success of a business idea. It has been argued that venture capitalists

“are not motivated by immediate profit but rather by a desire to promote human development

in the hope of huge capital gains as their pet projects attain maturity and they bow out”.

ii. Corporate Governance

Corporate governance is the key to ensuring transparency and accountability in the

corporate world today. This is basically intended to ensure that the Board acts always in the

best interest of the shareholders. For this purpose, SEC in collaboration with the Corporate

Affairs Commission launched a Code of Corporate Governance for Nigerian public

companies in 2003. The Code covers such areas as issues concerning responsibilities of

Board of Directors, Chairman and Chief executive Officers, Executive directors,

Shareholders rights and Audit committees, etc

All public Limited Liability Companies were advised to, henceforth, disclose their

level of compliance with the provisions of the document in their annual reports and accounts

and in their prospectuses whenever they are soliciting for funds from the public. The

Commission has since set up a department to, among other things, monitor public companies

compliance with the code.

Best Investment Practice

The Commission has introduced various measures to ensure best investment practices.

This has been addressed from two angles. From the operator’s point of view, the Commission

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has put in place a Code of Conduct for market operators basically to prevent conflict or

interest in their operations. It has also encouraged the formation of trade groups such as

Capital Market Solicitors Association, Association of Issuing Houses of Nigeria etc to check

the activities of their members. On its part, the Commission is a key member of the

International Organization of Securities Commissions (IOSCO) of which it is an Appendix

“A” signatory.

The membership of the Organization encourages the adoption of international best

practices in the issuance and trading of securities. The Commission also encourages best

practices through its investor education programmes. Several booklets by the Commission, in

addition to its media programmes are intended to equip the capital market investor with

knowledge for rational decision. Indeed, capital market investors are always advised to

contact accountants, bankers and other finance professionals before making some investment

decisions.

3.1.1. Review of Rules and Regulations

The revised Rules and Regulations will encompass changes in the operating

environment, enabling the exchange and operators to get a firmer grip on regulatory and

operational issues in the market and thereby improve on efficiency in service delivery.

Automation of Bond Market

Ahead of the listing of the N150 billion Federal Government Bond the exchange had

successfully transited from manual trading of debt securities to electronic trading, just as is

done in the equities sector of the market, the benefit in this is reflected in the ease and speed

with which transactions are now executed and reported in the bonds sector of the market.

E-Bonus

The Securities and Exchange Commission (SEC) granted approval for the

dematerialization of bonus shares, the exchange, working with the Central Securities Clearing

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System Limited (CSCS) and representatives of registrars, is in the process of issuing an

exposure draft of the guidelines for the dematerialization of bonus shares by quoted

companies. The process will enhance the market efficiency and unlock more investment

opportunities in the market.

3.1.2 Operations of Nigerian Capital Market in Enabling Companies to Raise Capital at

a Lower Cost

Market Development

There were activities during the review period to broaden participation in the market

and bring new liquidity into the market. Highlight of the various initiatives in this respect

include:

New Branches/Trading Floors: A new branch of the Exchange equipped for electronic

trading was opened in Benin City, Edo State to cater for the investment needs of residents of

Edo State and the neighbouring states. Also, arrangements were made for the opening of

additional branches/trading floors in Uyo, Akwa-Ibom State, and Bauchi State. Also work

commenced on the automation of Kaduna and Ibadan trading floors of the Exchange. The

automation of both branches would enable investors in those places to have their orders

executed online/real time, thereby offering them greater opportunity for best execution.

Those projects were concluded in 2006; along with the automation of the Onitsha

branch/trading floor.

The exchange sustained its investor education initiative during the year. The 6th

National Essay Competition for Secondary Schools and tertiary institutions was organized,

culminating in an award ceremony in Lagos on November 29. More than 10,000 entries were

considered for the various awards.

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Two international road shows were organized for the Exchange and some market

operators. The road shows took participants to London, United Kingdom and Nashville,

Houston, Newark and Washington DC, United State of America.

Ahead of the introduction of new products aimed at expanding and deepening the

market, the Exchange organized training programmes for market operators on derivatives

trading. Also, the exchange collaborated with the Pension Reform Commission to organize a

stakeholders’ meeting on the new Pension Reform. The meeting was well attended by the

target group.

On November 22, the exchange held the 28th edition of the Nigerian Stock Exchange

Annual President’s Merit Award ceremony in Lagos. Former Head of State and Commander-

in-Chief of the Armed Forces, General Yakubu Gowon, was the Special Quest of Honour,

Oando Plc retained the Quoted Company of the Year award for the second consecutive year,

while Guaranty Trust Bank Plc was the runner-up. Awards were conferred on 17 quoted

companies drawn from 15 industrial groups.

Dual Listing of Oando Plc: In November, Oando Plc, one of the eight companies listed in

the Petroleum (Marketing) subsector was granted secondary listing on the JSE Securities

Exchange of South Africa. The listing, which was facilitated by a Memorandum of

Understanding (MOU) between the Exchange and the JSE Securities Exchange of South

Africa, comes with a bundle of benefits for our market and the economy, especially as it

widens the corporate financing options for our companies and works to reduce the domestic

cost of capital to our companies.

Revocation of Dealing Licenses: In keeping with the commitment of the Exchange to

investor projection and the maintenance of discipline in the market, the Dealing Licenses of

six stock broking firms were revoked during the year. The Licences of Apex Securities

Limited, Beachgrove Securities Limited, Viva Securities Limited, Akitorch Securities

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Limited, Asset Plus Securities Limited and Halsec Securities Limited were cancelled because

of the failure of the board of the companies to discharge their functions and the companies’

violation of the rules and regulations of the Exchange, including unauthorized sale of clients’

shares and conversion of proceeds. It is expected that other market operators will take a cue

from this development and act professionally at all times in their dealings with clients and

one another.

NSE/CSCS Trade Alert: The Trade Alert was launched on 24th March 2005 to further

secure the market against unprofessional conducts, especially unauthorised sale of shares,

which are capable of eroding investor confidence. Also, the device functions as a medium for

communicating market-related information (like corporate actions) to subscriber. Investor’s

response (through subscription) has been satisfactory.

3.2 RESEARCH PROCEDURE

3.2.1 RESEARCH DESIGN

A research design is a plan or blue print which specifies how data relating to a given

study will be collected and analyzed with the aim of enabling the researcher test hypotheses

or answer research questions. It incorporates decisions taken regarding the collection of data.

Thus, a research design is essentially an outline or a scheme that serves as a useful guide to

the researcher in his effort to generate and analyze data in a study. Basically, two research

designs are distinguishable. They are: survey research design and experimental research

design. Survey research design applies when subjects are studied in their natural setting.

Conversely, experimental research design involves studying subjects under controlled

conditions. Survey research design is further categorized into: descriptive and historical or ex

post facto (Obasi, 1999).

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This study adopted a descriptive research design. Specifically, it was essentially

descriptive. In line with the nature of our topic, our study was conducted in the natural

settings of our subjects. In other words, we needed not control the conditions of our subjects

to generate reliable and dependable data. The technique used in data collection is classified

into two broad categories namely primary and secondary sources.

The linkage between capital market and economic growth has occupied a central

position in the development literature (see Samuel, 1996; Demirguc-Kunt and Levine, 1996:

Akinifesi (1987; Levine and Zervos, 1996; Obadan, 1998; Onosode, 1998; Emenuga, 1998;

Osinubi, 1998). In examining this on Nigeria’s data, the study is based on the neoclassical

growth model, otherwise referred to as the growth accounting framework, to explain the

source of growth in an economy. The national accounts form the basis of the work to be

analyzed and it is used in conjunction with the aggregate production function. This approach

has got a wide application in econometric analysis (for example, Akinlo and Odusola, 2000;

Levine and Zervos, 1996; Obstfeld, 1994).

Using a production function approach, it states that the growth rate of output (GDP) is

principally determined by the following factors:

• The rate of growth of gross labor and/or the rate of growth of its quality multiplied by

the labor income share;

• The rate of growth of gross capital input and/or the rate of growth of its quality,

multiplied by the capital income share, and

• Change in technology or total factor productivity (TFP)

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This is given as g = f (L, K, T)………………………………………….(1)

Where: g = growth of GDP

L = labor

K = capital formation/investment

T = technology

The application of this method, however, has been extended to incorporate other

determinants of economic activities such as financial sector development (proxy: by capital

market development index); trade (openness); debt overhang; state of political stability;

public policy (proxy: by public investment); and country/policy dummies (for example

Collier and Gunning, 1998; Demirguc-Kunt and Levine, 1996; Emenuga, 1998; Filler et al,

1999).

In line with the above specification, our model is specified thus:

g = f(fpcl, cmi, gk, pce, debthang, opens, polca, sapd)…………..…….(2)

Where:

g = growth rate of GDP,

gpci = capital market index proxy by growth of market capitalization (glmcap), new issues

(ni), and growth of value traded ratio (grv).

gk = gross capital formation;

pce = public capital expenditure;

debthang = debt overload proxy by export-GDP ratio;

opennes = openness proxy by the sum of export and imports as a ratio of GDP

polca = political dummy (coup or no coup); and

sapd = Structural Adjustment Program dummy (changes in government policy).

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The estimate form of the model is as given below:

g = (αo + β1 gpci + χ2 cmi + δ3 gk + ф4 pce + γ5 debthang + η6 openes + φ7 polca + ψ8 sapd + ɛ1)………………………………………………….…………..……(3)

Where αo, β1, χ2, δ3 ф4, γ5, η6, φ7, ψ8 are the parameter estimates and ɛ1 is the error term.

Equation 3 will be estimated using ordinary least squares technique (OLS). The

equation will also be subjected to a dynamic estimation, using the lagged structure of the

variables. There will be the determination of the existence of substantial co-movements

among time series variables. The reason for this is that when the dependent and independent

variables have unit roots, traditional estimation method, using observations on levels of those

variables, would likely find a statistically significant relationship, even when meaningful

“economic” linkage is absent (Akinlo and Odusola, 2000).

3.2.2 POPULATION OF THE SYUDY

The populations of this study are the Securities and Exchange Commission and the

Central Bank of Nigeria. These are managers and drivers of the capital market in Nigerian.

The organizations manage a critical element and infrastructure of the capital market in

Nigeria.

3.2.3 SAMPLE AND SAMPLING PROCEDURE OF THE STUDY

The sample for the study is comprised of the following: 5 managing directors of Securities

and Exchange Commission, and 3 executive directors of Central Bank of Nigeria, and 2

directors of Debt Management Office. These are recognized as possessing sufficient

knowledge of the subject that they constitute a rich trove of essential information.

The Securities and Exchange Commission is the apex regulatory agency for the

Nigerian capital market. Established by SEC Decree 29 of 1988, the Commission has evolved

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over the years with its current enabling law the Investment and Securities Act (ISA) 45 of

1999. The Commission has branch in Uyo commission on May 26, 2007 and inaugurated the

Automated Trading Floor on Monday, November 19, 2007. This should give more Nigerians

access to the market and expand the businesses opportunity for stockbrokers. The Exchange

has branches in Ilorin, Kwara State and Bauchi, Bauchi State. A new branch of the

Exchange equipped for electronic trading was opened in Benin City, Edo State to cater for the

investment needs of residents of Edo State and the neighbouring states. Also, arrangements

were made for the opening of additional branches/trading floors in Uyo, Akwa-Ibom State,

and Bauchi State. Also work commenced on the automation of Kaduna and Ibadan trading

floors of the Exchange. The automation of both branches would enable investors in those

places to have their orders executed online/real time, thereby offering them greater

opportunity for best execution. Those projects were concluded in 2006; along with the

automation of the Onitsha branch/trading floor

Table 3.1: Samples of Interviewees

Interview No. Organization or Office

Managing Director 5 Securities and Exchange Commission Operators Abuja

Executive Director 3 Central Bank of Nigeria

Director 2 Debt Management Office

3.2.4 SOURCES AND METHODS OF DATA COLLECTION

Data collections were done through two main sources. These were classified into two

broad categories, namely primary and secondary sources of data collection.

3.2.5 Primary Sources of Data Gathering

The primary sources were through interview. Our sample for the interview for the

study comprised those principal officers of the organization. These are recognized as

possessing sufficient knowledge of the subject that they constitute a rich trove of essential

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information. In addition, my twenty four years of working closely with banks as an

accountant of many local government education authorities exposed me more to these giants

in that sector. Most of the interviewees are familiar faces that, no doubt, shall be willing to

assist their colleague or friend in this assignment of gathering data for this study.

Consequently, the researcher carried out face to face interview with the respondents at the

various times and places.

The researcher’s privilege as a stakeholder in the industry produced immense benefits

to the study. The researcher has over twenty four years experience as a staff of the finance

department of primary education board and had been a participant observer involved in

several interactions amongst the relevant parties in financial administration over the years. He

had been involved in discussions, workshops, seminars, enlightenments, briefings and

negotiations involving financial maters and capital market operations in Nigeria. This

position was quite valuable in generating information for this study. As Ofuebe (2002) rightly

pointed out, participant observation is a research strategy aimed at gaining close and intimate

familiarity with the target group through direct involvement. It obtains in cases where the

observer shares with the observed in the activities being undertaken by the observed, and at

the same time, observing and noting the behaviour characteristics exhibited by the observed

(Douglas (1976). Thus, the researcher’s personal observation will be employed in this study

for data generation. Personal observation means looking at events of interest as they occur

naturally (Adedoyin, 1990).

3.2.6 Secondary Sources of Data Gathering

The second source of data collection was the secondary sources. The secondary data

were collected from books, journals, periodicals handbills, magazines, newspapers,

government publications, conference papers, published and unpublished works of relevant

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authors, documentaries, the Nigerian Stock Exchange Annual Report and Account, the

Central Bank of Nigeria (CBN) Statistical Bulletin and finally through the Information and

Communication Technology (ICT) such as the internet and computer print-outs. The use of

this secondary source was immensely beneficial as it allowed for much greater scope and

range of information collection and usage.

3.3 RELIABILITY AND VALIDITY OF THE INSTRUMENTS

Validity is defined as the degree to which a measuring instrument measures what it is

designed to measure while reliability is defined as the consistency between independent

measurements of the same phenomenon (Ofuebe, 2002). To ensure the validity of the

measuring instrument, efforts were made to see that the interview was designed and

conducted in such a manner that appropriate or correct responses from the sample subjects

were elicited. To achieve this, the assistance and advice of experts in the field of Public

Administration were solicited in ensuring a logical validation of the instrument.

In addition, some of the interviews were repeated after two weeks with a view to

establishing reliability. Some of the interviewees were contacted via phone to maximize the

enormous benefits of Information and Communication Technology (ICT) without

compromising our findings. The assumption is that under a stable condition, subjects usually

maintain consistent views within a space of time, but not for too long to warrant loss of

memory and change of mind. After the second phase of the interview, we recorded the

coefficient of correlation with the first result. Consequently, therefore, we are confident that

the final outcome or result of this study is reliable.

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3.4 METHOD OF DATA PRESENTATION AND ANALYSIS

The discourse analytic method was deployed in data presentation and analysis in this

study. Discourse analysis is a part of the linguistic turn in the social sciences and the

humanities which emphasizes the role of language in the construction of social reality. It is

one of the dominant or mainstream research approaches in communication, sociology, social

psychology, public administration and psychology. In discourse analysis, interview data are

analyzed at a macro-sociological level, as social texts. Discourse analysis is an approach

which surpasses the dichotomy between subjective meanings and objective reality, as well as

the dichotomy between user-centered and system-centered research (Talja, 1999). Discourse

analysis studies practices of producing knowledge and meanings in concrete contexts and

institutions. It systematizes different ways of talking in order to make visible the perspectives

and starting points on the basis of which knowledge and meanings are produced in a

particular historical moment. It pays attention to the way in which discourses produce and

transform social reality, and makes it possible to evaluate the practical consequences of

different ways of approaching a particular phenomenon, such as the capital market and

economic growth.

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CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND FINDINGS

4.1 DATA PRESENTATION AND ANALYSIS

In this section, data were presented and analyzed using two main strategies. The first

strategy was the research primary data source, which was obtained from an empirical analysis

of interview conducted with the respondents. These respondents formulate and implement

policies that guide the capital market in Nigeria. The second strategy used in obtaining data

for presentation and analysis was secondary source which involved the systematic

examination of published and unpublished materials, like articles, reports and official

document considered relevant to this study.

Data obtained through the research interview schedule conducted on the respondents

(primary source) and through the secondary source were targeted at proving or disproving the

hypotheses and the research objectives of the study. The analysis of the hypotheses and the

research objectives cover three major areas of the study.

The first part dealt with the number one research objective and hypotheses which

examined the facilitation of wealth creation and provision of long-term funds needed for

economic development in Nigeria from 1980 – 2009. It sought to ascertain whether the roles

of capital market in facilitating wealth creation have resulted to economic development in

Nigeria.

The second part of the analysis dealt with the number two research objective and

hypotheses which examined the challenges confronting the Nigeria Capital market in

mobilizing long-term funds for economic development and wealth creation in Nigeria. A

number of factors were examined in terms of their impact on the mobilization of long term

funds for economic development in the country.

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The third part of the analysis dealt with testing of the number three research objective

and hypothesis which examined measures that could be proffered to enhance the capacity of

the Nigerian capital market in mobilizing long term funds for economic development in

Nigeria. A number of factors represented in the interview schedule and Nigerian Stock

Exchange market capitalization ratio statistics were used to answer the research question and

hypothesis respectively.

4.1.1 THE NIGERIAN CAPITAL MARKET, WEALTH CREATION AND

PROVISION OF LONG-TERM FUNDS FOR NATIONAL DEVELOPMENT IN

NIGERIA, 1980-2009

Mobilization of resources for national development has long been the central focus of

development scholars. As a result of this, the centrality of savings and investment in

economic growth has been given considerable attention in the literature (Rostow, 1960;

Malivaud, 1979; Soyode, 1990; Aigbokan, 1995; Samuel, 1996; Demirgue-Kunt and Levine,

1996). For sustainable growth and development, funds must be effectively mobilized and

allocated to enable businesses and the economy harnessed their human, materials and

management resources for optimal output. The stock market is an economic institution, which

promotes efficiency in capital formation and allocation. The stock market enables

governments and industry to raise long-term capital for financing new projects, and

expanding and modernizing industrial/commercial concerns. If capital resources are not

provide to those economic areas, especially industries where demand is growing and which

are capable of increasing production and productivity, the rate of expansion of the economy

often suffers. A unique benefit of the stock market to corporate entities is the provision of

long-term, non-debt financial capital. Through the issuance of equity securities, companies

acquire perpetual capital for development. Through the provision of equity capital, the market

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also enables companies to avoid over-reliance on debt financing, thus improving corporate

debt-to-equity ratio.

Since the introduction of Structural Adjustment Programmes (SAP) in Nigeria, the

country’s stock market has grown very significantly (Allile, 1996; Soyode, 1990). This is as a

result of deregulation of the financial sector and the privatization exercises, which exposed

investors and companies to the significance of the stock market. Equity financing became one

of the cheapest and flexible sources of finance from the capital market and remain a critical

element in the sustainable development of the economy.

As economies develop, more funds are needed to meet the rapid expansion. The stock

market serves as a veritable tool in the mobilization and allocation of savings among

competing uses which are critical to the growth and efficient of the economy.

The determination of the overall growth of an economy depends on how efficient the

stock market performs its allocation functions of capital. As the stock market mobilizes

savings, concurrently it allocates a larger proportion of it to the firms with relatively high

prospects as indicated by its rate of returns and level of risk. The importance of this function

is that capital resources are channelled by the mechanism of the forces of demand and supply

to those firms with relatively high and increasing productivity thus enhancing economic

expansion and growth.

Finance is the life-blood of any organization. The capital market is the segment of the

financial market which facilitates the mobilization and allocation of medium and long-term

funds through the issuance and trading of financial instruments. Such instruments also known

as securities, involve equities and bonds, equity represents ownership stake in a company

which issued them, bond on the other hand are the debt instruments with the principal and

interest usually payable to the bond holder at specific period. The capital market is made up

of two inter-related segments. The primary market is the mechanisms for raising funds

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through the issuance of new securities. The secondary market essentially provides facilities

for transferring of already issued securities, thereby creating liquidly in the market. Thus

quoted securities are usually more attractive as investors can more easily turn them to cash

whenever they desire. As the major source of appropriate long-term fund, the capital market

is obviously crucial to any nation’s economic development. The capital market facilitates

economy growth by mobilizing savings from numerous economic units, government and the

private sector.

Ewah et al (2009) appraised the impact of capital market efficiency on economic

growth in Nigeria, using time series data on market capitalization, money supply, interest

rate, total market transaction, and government development stock between 1961-2004 using

multiple regression and ordinary least squares estimation techniques. The result of the study

shows that the capital market in Nigeria has the potential to induce growth, but it has not

contributed meaningfully to the economic growth of Nigeria because of low market

capitalization, low absorptive capacity, illiquidity, and misappropriation of funds among

others (Kolapo and Adaramola, 2012).

Sustained recovery now requires effective reform of financial markets. As only a

more ethical and responsible financial sector can properly serve the needs of the economy.

Effective regulation is in the interest of financial institutions. One step in this direction has

been the issue of the adoption of International Financial Reporting Standards (IFRS) which

the Nigerian Stock Exchange proposes to adopt. Another crucial factor for a sustained

recovery is the role of the proposed Asset Management Company (AMC). The proposed

Asset Management Company (AMC) offers the Nigeria financial markets the opportunity of

a life time to strengthen our infrastructure and put us in a better position to deal with

contingencies as experienced by the market in 2008/2009. The regulatory authorities have

met to decide on a proposed structure and the President has sent the bill to the National

138

Assembly. It is important that the bill is passed as soon as possible in order that the AMC can

come into existence and remove a large chunk of the non-performing loans from the books of

the banks thereby freeing up credit that can be used to drive economic growth. The guidelines

for the operation of the AMC must be formulated to take care of the important details not

covered by the bill when it eventually becomes an Act.

The Nigerian Capital Market commends the Federal Government for sustaining the

issuance of bonds through the Debt Management Office (DMO), however, for the purpose of

transparency and pricing efficiency, the Exchange should make the request that the DMO

consider migrating trading on the Over the Counter (OTC) to the Nigerian Stock Exchange

trading platform, which has the technology to deliver on transparency and efficiency. It is

significant that, contrary to local argument that bonds are better traded OTC; last year the

London Stock Exchange launched a new retail bond market for the UK. Also, the market

would be order-driven, as against the contention in certain quarters here that a liquid bond

market must be quote-driven.

Furthermore, since the original intention in the organization of the government bond

market was to replicate the bond market of South Africa, in spite of advice to the contrary,

the acquisition of Bond Exchange of South Africa by the JSE Securities Exchange should

cause the DMO and SEC to review the extant strategy for reactivating the Nigerian bond

market.

The issue of bond trading and investing has become more important recently as a

result of the problems suffered in Dubai. Because of the near default by Dubai World, bond

investors worldwide started reviewing their exposure to sovereign and quasi-sovereign debt

in order to avoid any potential default or liquidation. The recent classification by the USA,

Nigeria may likely experience a lesser participation by international investors in its bond

market. This makes it even more important to open this segment to the retail investors,

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especially at a time when we anticipate several Sovereign, State and Corporate bond issues

coming to the market in the near future. This is another reason we hope DMO will review its

decision and migrating trading from the OTC to the Exchange platform.

Over time, The Exchange has brought to the fore, challenges militating against stock

market development in Nigeria. These challenges include the incidence of multiple tax

regimes on businesses and investors, and the slow pace in the implementation of the

privatization programme, especially those earmarked to be consummated through the stock

market. The Exchange urges the National Assembly to expedite action on all bills on Tax, Oil

and Gas reforms, Privatization and Capital Market reforms currently before it. The Exchange

appeals to government to review the tax structure holistically, with a view to streamlining the

tax system and remove incidence of multiplicity of taxes by the three tiers of government.

The Exchange plans to sensitize the investing public on the various opportunities available in

the stock market.

The Exchange is continuously working to support government and its agencies

towards the realization of Nigeria’s economic development and growth objectives, working

closely with the Federal Ministry of Finance, CBN, SEC and other members of the Financial

Sector Regulation Coordinating Committee (FSRCC), while maintaining relationships with

operators in the international arena, with a view to facilitating the flow of international

investment capital to Nigeria. In taking such pro-active measures the intent is to enhance the

quality of the overall market.

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Table 4.1: Statistical Summary of Market Performance in 2008 & 2009

2008 2009 % Change

Market Capitalization N9.56 trillion N7.03 trillion (26.5)

The NSE All-Share Index 31.450.78 20.827.17 (33.8)

The NSE 30 Index 853.43 827.99 (3.0)

The NSE Food Beverage Index 559.34 526.71 (5.8)

The NSE Banking Index 498.77 339.32 (32.0)

The NSE Insurance Index 640.60 249.01 (61.1) The NSE Oil/Gas Index 721.58 288.06 (60.1)

Total Turnover Volume 193.14bn shares 102.85bn shares (46.75)

Total Turnover Value N2.4 trillion N685.72billion (71.43)

Average Daily Volume 775.65 million 414.73m units (46.53)

Average Daily Turnover N9.55billion N2.76billion (7.1)

New Issues Approved N2.6 trillion N279.25b (89.3) Number of Listed Companies 213 216 1.41

Number of Listed Securities 299 266 (11.4)

Source: Nigerian Stock Exchange, Annual Report and Account for the Year Ended 31st December 2009.

Table 4.2: Statistical summary of market performance in US dollars

Source: Nigerian Stock Exchange Annual Report and Account for the Year Ended 31st December 2010

4.1.1.1 The Nigerian Capital Market and Its Roles in the Nation’s development

Finance is the life-blood for any business enterprise. Funding for economic activities

must be adequate and appropriate. The issue of adequacy is easily comprehended as the

evidence of under-funded and consequently abandoned projects abound everywhere. What is

however not clear to many is that some otherwise viable projects have also collapsed due to

the use of short-term funds, usually in the form of bank loans to finance projects with long

gestation periods. The need to repay such loans before the projects can generate sufficient

funds to sustain them had often led to the collapse of such businesses.

2008 2009 Market capitalisation $80.6 billion $47.75 billion Total turnover value $20.1 billion $4.7 billion

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The capital market is the segment of the financial market which facilitates the

mobilization and allocation of medium and long-term funds through the issuance and trading

of financial instruments. Such instruments, otherwise known as securities, include equities

and bonds. While equities represent ownership stake in a company which issued them, bonds

are debt instruments with the principal and interest usually payable to the bondholder at

specific periods. The capital market is made up of two inter-related segments. The primary

market is the mechanism for raising funds through the issuance of new securities. The

secondary market essentially provides facilities for trading in (transferring) already issued

securities, thereby creating liquidity in the market. Thus, quoted securities are usually more

attractive as investors can more easily turn them to cash whenever they do desire.

As the major source of appropriate long-term funds, the capital market is obviously

crucial to any nation’s economic development. Specifically, the capital market facilitates

economic growth by, among other things, mobilizing savings from numerous economic units

such as governments and the private sector. It also improves the efficiency of capital

allocation through a competitive pricing mechanism.

The Director General, Debt Management Office argued that in 2007, work continued

in the effort to deepen the Nigerian capital market by creating new products. Some of the new

products considered by the Exchange include; Mortgage-Backed Securities, Asset-Backed

Securities, Exchange-Traded Funds, and Derivatives such as Futures and Options.

He further argued that significant headway was made on the arrangement for the

introduction of Real Estate Investment Trust (REITs), with the incorporation of the rules for

this new market segment in the Listing Requirements of the Exchange. In the same vein, the

Exchange incorporated into its Listing Requirements rules for the operation of a Third-Tier

Securities Market for small and medium indigenous companies.

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Cross-border Listing

The Central Bank Governor posit that the Exchange facilitated a landmark transaction

that led to the successful issuance of a Global Depository Receipt (GDR) by Guaranty Trust

Bank Plc on the London Stock Exchange, thereby expanding the financing options for the

listed companies.

Introduction of the Third-Tier Securities Market

The Permanent Secretary Ministry of Finance argued that the introduction of the

Third Tier Market in 2007 with the objective of assisting indigenous small and medium

enterprises access the stock market for financing. A stakeholder’s forum was held at the

Exchange on July 10, 2007 to propagate the objectives of this initiative, which is also aimed

at expanding the market and increasing available securities.

Regional Integration

The director general of Securities and Exchange Commission argued that the

Exchange was an active participant in the ongoing effort to integrate the markets of West

Africa. The modalities for the proposed integration are being worked out, with a view to

enabling the participating countries to exploit the economy of scale inherent in an integrated

West African Stock Market.

The Director General, Securities and Exchange Commission argued that the total

market value of 266 securities listed on the Exchange dropped by 26.5%, from N9, 563

trillion to stand at N7/03 trillion at year 2009. According to him, the decline in market

capitalization resulted mainly from equity price losses, and the delisting of 64 securities – 11

equities and 53 fixed securities. Market capitalization had in 2008 declined by 28.1% he said.

He further argued that by year-end, the market capitalization of the 216 listed equities

accounted for N5 trillion or 71.04% of the aggregate market capitalization (2008:213 equities

accounted for N7 trillion or 73.1% of market capitalization). Also, by year-end he said, seven

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subsectors recorded increased market capitalization of between 6% and 69.3%, while

subsectors suffered a reduction in market capitalization of between 6.4% and 77.3%. Two

subsectors (Machinery Marketing and Aviation) did not record any change in market

capitalization he revealed.

He revealed further at the end of the year, the following 20 companies emerged with

the highest market capitalization, in descending order.

Table 4.3: Statistical Summary of Emerged Companies with the Highest Market

Capitalization S/No Company NSE Sector

Classification Market

Capitalization

(N’Billion)

Annual

Change (%)

1. First Bank of Nigeria Plc Banking 407.54 (22.35 2 Nigerian Breweries Plc Breweries 401 29.8 3 Zenith Bank Plc Banking 341.6 (7.3) 4 Guaranty Trust Bank Plc Banking 289.13 48.3 5 UBA Plc Banking 232.81 2.7 6 Guinness Nigeria Plc Breweries 188.05 28.1 7 Dangote Sugar Refinery Plc Food & Beverages 181.2 2.6 8 Benue Cement Company

Plc Building Materials 168.41 198.1

9 Nestle Nigeria Plc Food & Beverages 158.2 25.1 10 Stanbic IBTC Bank Plc Banking 140.1 (31.5) 11. Ecobank Transnational Inc

Plc The Foreign Listings 130.4 (52.31)

12 Access Bank Plc Banking 124.92 7.5 13 First City Monument Bank

Plc Banking 116.5 18.54

14 Diamond Bank Plc Banking 107.12 (0.8) 15 Lafarge Cement WAPCO

Nig. Plc Building Materials 90.05 17.65

16 Oando Plc Petroleum (Marketing) 85.1 17.81 17 Union Bank of Nigeria Plc Banking 81.1 (53.95) 18 PZ Cussons Nigeria Plc Conglomerates 79.41 122.42 19 Ecobank Nigeria Plc Banking 76.73 (62) 20 Unilever Nigeria Plc Conglomerates 70 78.23 Source: Nigerian Stock Market Annual Report and Financial Statement for the Year Ended 31st December 2009 The above 20 most capitalized companies, as at the year’s end, accounted for 69.5%

of the equity market capitalization and 49.4% of the total market capitalization of the

Exchange. Consequently, changes in the prices of these stocks impacted substantially on the

total market capitalization and the All-Share Index. The combined share of market

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capitalization of Federal Government Bonds, State Government Bonds, Preference Shares

and Industrial Loans stood at N2.04 trillion of 29% of the total market capitalization.

Specifically, the share of FGN Bonds stood at 27.5% by year end he revealed.

The Director General, Securities and Exchange Commission was of the view that the

Nigerian Stock Exchange All-Share Index (ASI) dropped by 33.8% or 10,623.61 points to

close at 20,827.17. The NSE ASI had in 2008 dropped by 45.8% or 26.539.44 points to close

at 31,450.78. Accordingly, the performance of the Index reflects a significant reduction in

prices of equities during the year. He further said that by year’s end, 23 stocks recorded price

appreciations and 159 stocks recorded price declines while the prices of 35 remained

constant. Thus, in 2008, 78 stocks recorded price appreciations and 111 stocks recorded price

declines while the prices of 24 remained constant.

As expected, the new NSE-30 index showed resilience by dropping only 25.44 points

or 3% to close the year at 827.99. This is due mainly to the index’s broad-based structure and

limited exposure to any sector in particular – two key requirements for products such as

Exchange Traded Funds (ETFs) and derivatives.

The exchange also introduced four sector indices during the year. By the year’s end,

however, all the four sector indices had depreciated – the NSE Food/Beverage Index dropped

by 32.63 points or 5.83% to close at 526.71; the NSE Banking Index dropped by 159.45

points or 32% to close at 339.32; the NSE Insurance Index dropped by 391.59 points or

61.13% to close at 249.01; and the NSE Oil/Gas Index dropped by 433.52 points or 60.1% to

close at 288.06.

On the new issue, the Director General, Securities and Exchange Commission who

also compared the preceding five years said that, the primary market was less active in 2009,

in terms of number of applications received and issues offered for public subscription.

According to him, this can be attributed to the liquidity crisis and the overriding pessimism of

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investors. According to him, the exchange considered and approved 30 applications for new

issues valued at N279.25billion or 1.2% of GDP, as against 70 applications for new issues

valued at N2.6 trillion or 11.3% of GDP in 2008.

However, the non-bank corporate issue accounted for 71.5%, with 25 applications

valued at N199.65 billion while the banking sector accounted for 3.6%, with one application

valued at N10.1 billion. The State Government bond issues accounted for N69.5 billion or

24.9% of the total amount approved during the year. Of the non-bank applications, the

Foreign Listings and Insurance subsectors accounted for N27.5 billion and N33.22 billion or

9.84% and 11.9%, respectively of total applications considered. No new IPOs were approved

in 2009 (compared to N1.01 trillion in 2008) while N14.7 billion was raised through

supplementary issues, N31.72 billion through rights issues, and N71.74 billion through bonds

issue, including four State Government Bonds Listing by introduction accounted for N131.04

billion, while Shares Placing accounted for N7.4 billion. Also approved were four

applications by Unit Trust for Memorandum listings valued at N22.8 billion

Table 4.4: Top five new Issues Approved in 2009

S/No Issuer Amount (N) Type of Issue

1 Guaranty Trust Assurance Plc 30.0 billion Listing by introduction

2 Ogun State Government 28.0 billion Bond

3 Pinnacle Point Group Plc 27.5 billion Listing by introduction

4 Cadbury Nigeria Plc 22.22 billion Rights

5 e-Tranzact International Plc 20.16 billion Listing by introduction

Source: Nigerian Securities and Exchange Annual Report and Financial Statement for the Year Ended31st December 2009 4.1.1.2 Activities in the Nigerian Secondary Market

The positive trend in the market continued at even a faster rate in the late 1980’s. The

share of government securities in the number and value of transaction fell from 1.44% and

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92.6, in 1985 to 1.15 and 88.9% respectively in 1987, falling further to 0.39 and 65.13% in

1990, 0.10 and 10.4% in 1993 and 1995. This development is in line with Structural

Adjustment Program policy of allowing greater private sector participation in the economy.

Unlike the above picture, the trend in the total number and value of securities traded in the

capital market over the same period as being erratic with decline in number 1990 and 1993

and the value in 1985. Both the secondary and primary market recorded massive growth in

1995 as a result of the relative calm in industrial environment (compared with 1993 and

1994), the repealing of the Nigeria enterprise promotion (NEP) Decree and Exchange

Countries Act (ECA) of 1962. Another development that aided positive growth in 1995 was

the promulgation of the Nigerian Investment Promotion commission (NIPC) Decree No. 16

and the Foreign Exchange provision decree No. 17 of 1995 (Josiah, Adedinran and Akpeti,

2012).

The stock exchange began its operation on 6th June, with 8 securities listed on it.

Activities in the year 2001 shows that exchange as 282 securities made up of 19 government

stock / bond, 49 industrial loan (debentures) or preferences. Six companies were listed on this

segment of the stock market by 1988 and by 2002 over twenty-three companies had availed

themselves of the opportunities offered by this market. Over the years, the listing has

increased and as at November 30th, 1985 there were 20 securities on the exchange official

list, and increasing to 290 as at the end of April 2007. Although a small market by

international standard, the Nigerian capital market is one of the leading markets in Sub-

Saharan Africa and has made some notable strides in recent years. With a history of over 50

years (when the first public issue was floated) and 42 years of a stock exchange, equity

listings and market capitalization are still relatively small, standing at 196 and US$7.0 billion

respectively at the end of March 2003. The value of equities traded at year-end 2002 was

US$0.5 billion, a much lower figure than market capitalization. As a result of this, turnover

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ratio of 7.9% was recorded at the end of 2002, higher than the average turnover ratio for 1998

to 2002. From a historical perspective, this figure except for 2001 is an improvement,

evidencing the continued rise in activities in the market (Josiah, Adedinran and Akpeti,

2012).

The market has been quite active this year with traded equities of N10.8 billion (US$

86 million) in January 2003, which represented about 18% of the total equity value in 2002.

By end of March 2003, N24 billion (US$188.9 million) equities had been traded. It is

important to point out that the depreciation of the local currency, the naira, has continued to

impact on the size of the market in dollar terms. Between 1997 and December 2002, the naira

lost over half its value to the dollar. As a result, while market capitalization witnessed

impressive growth in local currency terms, this was not the case in dollar terms as a much

slower growth was registered. For instance, in the five years ending 2002, equity market

capitalization recorded almost three-fold increase from N256.8 billion in 1998 to N748.7

billion in 2002 or a 191.5% increase while it rose by 52.6% or from US$3.8 billion in 1998 to

US$5.8 billion in 2002 (Josiah, Adedinran and Akpeti, 2012). The point being made is that, if

the local currency had been strong, the dollar size of the market would have been larger.

In 2002, equity market capitalization grew by over N100 billion (US$794million) or

15% and has remained on the upward swing this year. In the month of January 2003, equity

market capitalization rose by over 12.4% and by February 2003, it had gained N116 billion

(US$0.9 billion) over December 2002 more than the increase in the whole of that year.

However, in March 2003, market capitalization rose by N98.2 billion (US$0.8 billion) over

December 2002. If this trend continues, market capitalization by year-end 2003 is likely to

significant surpassing the gain recorded in 2002.

The impressive movement in market capitalization has been led principally, by new

listings, and firmer prices arising from positive market sentiments. In 2004, the stock index

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rose by 10.7% albeit lower than the price increase of 35.2% in 2003 and 54.0% in 2000. In

point of fact, the five years (2000 to 2005) average index growth of 33.3% was higher than

the growth of inflation, which averaged 12.6% during the same period.

The impressive expansion of the capital market is also evident in the size (percentage)

of market capitalization to gross domestic product (GDP). A look at this over the past decade

shows that market capitalization represented 14.0% of GDP in 2002 in contrast to 12.0% in

2005, 9.4% in 1999 and 5.6% in 1992. The rising trend indicates that market capitalization is

growing faster (in percentage terms) than GDP (Josiah, Adedinran and Akpeti, 2012).

The number of securities listed on the exchange dropped to 266 from 299 in 2008.

The stock market indicators recorded downward movements. In addition, a significant

portion of the funds that left the stock market for the Private Placement Market in 2007/8

remained locked-in, as many of the issuers have not yet applied to the Nigerian Stock

Exchange for listing.

The turnover on the Exchange closed the year at N685.72 billion or 2.9% of GDP,

down by 71.2% from the N2.4 trillion (10.4% of GDP) recorded in 2008. Average daily

activity according to him dropped from 775.65 million shares worth N9.55 billion in 2008 to

414.73 million shares valued at N2.8 billion in 2009. The bulk of the transactions were in

equities, which accounted for N685.3 trillion or 99.94% of the turnover value compared to

N2.376 trillion of 99.85% recorded in 2008. Transactions in the industrial bonds sector he

went on to say, accounted for N412.8 million or 0.06% compared to N3.53 billion or 0.15%

in 2008, while transactions in the State Government bonds sector were very minimal,

accounting for only N119.530. According to him the Preference Stocks subsector was

inactive in 2009.

Furthermore, turnover on Federal Government bonds on the Exchange was idle while

a turnover of N18.51 trillion in 134.120 deals was recorded in the over-the-counter (OTC)

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market for Federal Government bonds, as against N10.44 billion in 78.248 deals recorded in

2008. Overall, the Exchange’s Turnover Ratio dropped from 21.86% in 2008 to 13.26% in

2009, attributing to the decline in stock prices. The following is a list of the year’s 20 most

active stocks (by turnover volume).

Table 4.5: Statistical summary of Exchange’s Turnover Ratio

S/No Company Volume Traded (Billion shares)

1. Access Bank Plc 6.348

2. UBA Plc 5.405

3. Wema Bank Plc 4.914

4 First Bank of Nigeria Plc 4.804

5 Guaranty Trust Bank Plc 4.413

6 Zenith Bank Plc 3.823

7 Intercontinental Bank Plc 3.209

8 FinBank Plc 3.004

9 First City Monument Bank Plc 2.929

10 Oceanic Bank International Plc 2.902

11 Diamond Bank Plc 2.849

12 Fidelity Bank Plc 2,805

13 Skye Bank Plc 2.541

14 AllCo Insurance Plc 2.388

15 Goldlink Insurance Plc 2.203

16 Bank PHB Plc 1.938

17 Investment & Allied Assurance Plc 1.795

18 Chams Plc 1.789

19 Transnational Corporation of Nig. Plc 1.718

20 International Energy Insurance Plc 1.666

Source: Central Bank of Nigeria, Annual Report and Statement of Account for the Year Ended 31st December 2008 The banking and insurance subsectors accounted for 18 of the Top 20 companies by

turnover volume, consequent upon their being the most capitalized subsectors while also

having the largest float. Information and Communication Technology and Conglomerates,

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had one representative each to complete the Top 20 list. On trading in rights, the traded rights

in two companies, compared to four companies in 2008. In all, 136 deals valued at N46.04

million were executed in this market segment in 2009, down by 87.1% on the 357.05 million

values of transactions in the previous year. The companies whose rights were traded during

the year are Cadbury Nigeria Plc and Eterna Oil & Gas Plc.

4.1.1.3 Influence of Nigerian Capital Market on Individual Savings in National

Development

In its World Economic Outlook (April 2009) released in Washington D.C., the

International Monetary Fund (IMF) projected that the Nigerian economy will only grow by

2.9 percent in 2009. This will mean a decline of 2.4 percent from the 5.3 percent growth

achieved in 2008. But according to the Nigerian CBN governor, Nigeria’s projected growth

will be higher than the average for sub-Saharan Africa, which the IMF said will be 1.5

percent in 2009. Worst still, the national economy is projected to decline further he said in

2010, growing by only 2.6 percent. Accordingly, this represents a decline of 0.3 percent from

the 2009 level. The inflation rate is also projected to remain high in the year at 14.2 percent;

up from the 11.2 percent level of 2008 he revealed (www.centralbanknigeria.com).

According to the CBN Governor, in 2008 inflation began its upward sojourn crossing

back to double digits in June which stood at (12%). This was attributed to Nigeria’s import

dependent nature. He said that the acceleration was attributable to a surge in food prices

maintaining that, although the non-food prices were also rising. The Federal Office of

Statistics (FOS) attributed the food component of CPI to about 64%. The CBN after its board

meeting in Abuja during the month of April took the decision to ensure compliance with

interest rates regulations. The apex bank also announced a reduction of the Monetary Policy

Rate from 9.75% to 8% as part of the measures to boost liquidity in the economy. The MPR

(Monetary Policy Rate) which is Nigeria’s benchmark interest rate was slashed to 8% from

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9.75% on Wednesday 8th of April, 2009. The Monetary Policy Committee (MPC) said that

from April 14, it was reducing the cash reserve requirement (CRR) to 1% from 2% and

lowering liquidity ratio for banks to 25% from 30%. The CRR is the ratio of cash to deposit

liabilities held at the central bank. Its increase would require banks keeping more money with

the CBN, while a decrease suggests, banks have more money at their disposal. The measures

should improve liquidity in the banking system by easing the credit crunch experienced since

the beginning of the year (www.nigeriacentralbank.com).

“The Monetary Policy Committee (MPC) observed the relative tight monetary

conditions in the economy and hence the need for monetary easing” the then Central Bank

Governor Chukwuma Soludo said, but added that the economy of Africa’s biggest oil

producer was on a solid footing. “The committee noted that the financial conditions in the

country remain robust. There are no apparent systemic threats to the banking system”, he

said. The Central Bank had tried to increase bank’s access to funding last year, cutting the

Cash Reserve Requirement (CRR) from 4% to 2% and lowering the liquidity ratio from 40%

to 30% in September and expanding access to discount window. These series of measures are

expected to boost-liquidity in the economy.

The CBN Governor said, “The domestic monetary market rates have been under

pressure since February 2009. The weighted average inter-bank call rate went up from 17.62

percent in February to 22.15 percent in March. The collateralised Open Buy Back rate,

however, was lower than the Monetary Policy Rate (MPR). The deposit and lending rates too

have inched up”.

From the foregoing discussions, the Nigerian economy has since benefited from the

capital market in the following ways:

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Cash: Enormous sums could be raised on the capital market without the limitations

associated with bank financing. For instance, no single bank would have given Edo State

Government the N1billion it raised from the market in 2004; not even loan syndication would

have provided the kind of comfort the banking industry would have required considering

credit rules and safety considerations.

Liquidity with Employees: For enterprises, employees could be offered incentive through

stock options. The underlying benefit is the hope that someday the company will go public

and employees would be able to exercise their stock options to create wealth for themselves.

Liquidity for Investors: Creating a public market for a stock, raising funds on the capital

market through stock exchange listing result in liquidity for investors.

Marketability of Shares: Quotation on the stock exchange increase marketability of the

shares. An issued security can be traced and valued easily and can also be used as collateral

for bank loans. This greatly increases the potential on the business and personal benefit to its

owners.

Continuity: For an enterprise, the survival and the continuity of a company based on the

exchange is guaranteed after the death of its founders.

Public Confidence: A company quoted on the exchange enjoys greater confidence from its

investors and the banks. Bank managers find it easier to offer credit to a quoted company

than to an unquoted one.

Sharing Risk and Retaining Control: There is opportunity for existing shareholders to share

part of their investment risks while still retaining control of the company.

Expansion and Modernization: Proceeds from the issue can be used for expansion and

modernization of the company.

Finally, the economic significance that will accrue to state and local governments

which patronize the capital market are many. Some of which are;

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i. More capital projects can be completed as more resources are available for government

capital expenditure.

ii. There will be better accountability for use of funds as statutory financial market.

iii. Rising of funds from the capital market will release government subvention for purely

social project.

Conclusively, the tendency to spend money on "white elephant project" will be

curtailed as only economically viable projects could be financed from the capital market

(Adewuyi and Olowookere, 2011).

Consequently, the hypotheses that the Nigerian capital market facilitates wealth

creation and provision of long-term funds that engendered economic development in Nigeria

between 1980 to 2009 is justified considering the market performance which increased all-

share index, market capitalization and even the companies index considerably. The increase

in the turnover volume is highly great. Again twenty indigenous companies became active

participants within the period. There were improvements in the new issue and the secondary

market. The bond market witnessed new entrants, thereby boosting liquidity in the market.

4.2 ADMINISTRATIVE CHALLENGES CONFRONTING THE NIGERIAN

CAPITAL MARKET HINDERING ITS EFFICIENCY IN MOBILIZING LONG-

TERM FUND FOR NATIONAL DEVELOPMENT

The Exchange has brought to the fore, challenges militating against stock market

development in Nigeria. These challenges include the incidence of multiple tax regimes on

businesses and investors, and the slow pace in the implementation of the privatization

programme, especially those earmarked to be carried out through the stock market. The

Exchange urges the National Assembly to expedite action on all bills on tax, oil and gas

reforms, privatization and capital market reforms before it. The exchange appeals to

government to review the tax structure holistically, with a view to streamlining the tax system

and remove incidence of multiplicity of taxes by the three tiers of government. Adeyemi

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(1998) identified a number of factors that account for lack of interest by Nigerian companies

in being listed in the exchange (i) high cost of public quotation, (ii) reluctance to dilute

ownership and control through quotation (iii) the interest rate structure in the past which

favoured debt financing over equity financing, and (iv) stringent requirement for listing.

Yartey and Adjasi (2007) argue that liquidity remains a crucial factor in capital

market. Liquidity refers to the ability of investors to buy and sell securities easily. It is an

important indicator of stock market development because it signifies how the market helped

in improving the allocation of capital and thus enhancing the prospects of long-term

economic growth. This is possible through the ability of the investors to quickly and cheaply

alter their portfolio thereby reducing the riskiness of their investment and facilitating

investments in projects that are more profitable through with a long gestation period. Two

main indices are often used in the performance and rating of the stock market; total value

traded ratio and turnover ratio.

Total value traded ratio measures the organized trading of equities as a share of the

national output. The Annual Report and Accounts Statement of Nigerian Stock Exchange

reveals that for the period 1980-1999 it averaged 0.25 per annum with the highest of 12.14 in

1999 and lowest of 0.24 in 1991. Turnover ratio is used as an index of comparison for market

liquidity rating and level of transaction costs. This ratio equals the total value of shares traded

on the stock market divided by market capitalization. It is also a measure of the value of

securities transactions relative to the size of the securities market. The Nigerian Stock

Exchange had an annual average turnover ratio of 0.04 between 1980 and 1999. This low

index is an indication of relative illiquidity and stunting of the overall growth of the market.

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Table 4.6: Traded and Turnover Ratio Year

(1)

Market

Capitalization

(2)

Gross

Domestic

Product (at

1984 factor

cost (3)

Market

Capitalization

Ratio

(4) = (2+3)

Total

Value of

Domestic

Shares

Traded (5)

Value

Traded

Ratio

(6) = 5(+3)

Turnover

Ratio

(7) = (5-2)

= billion = billion % = billion % %

1980 4.46 96.19 4.64 0.52 0.54 11.66

1981 4.84 70.40 6.88 0.33 0.47 6.82

1982 4.92 70.16 7.01 0.22 0.31 4.47

1983 5.80 66.39 8.74 0.40 0.60 6.90

1984 5.50 63.01 8.73 0.25 0.40 4.55

1985 6.40 68.92 9.29 0.31 0.45 4.84

1986 7.70 71.08 10.83 0.49 0.69 6.36

1987 8.90 70.74 12.58 0.29 0.41 3.26

1988 9.70 77.75 12.48 0.25 0.32 2.58

1989 12.00 83.50 14.37 0.65 0.78 5.42

1990 15.90 90.34 17.60 0.31 0.34 1.95

1991 22.60 94.61 23.89 0.23 0.24 1.02

1992 32.50 97.43 33.36 0.49 0.50 1.51

1993 46.90 100.02 46.89 0.66 0.66 1.41

1994 65.50 101.33 64.64 0.99 0.98 1.51

1995 171.10 103.51 165.30 1.84 1.78 1.07

1996 285.60 107.02 266.87 7.06 6.60 2.47

1997 292.00 110.40 264.49 11.07 10.03 3.79

1998 263.30 112.95 233.11 13.57 12.10 5.22

1999 300.00 116.00 258.62 14.08 12.14 4.69

Sources: Nigerian Stock Exchange Annual Reports and Accounts, Various years, Securities and Exchange Commission Annual Reports and Accounts; Central Bank of Nigeria Statistical Bulletin 1998 and the Federal Officer of Statistics Statistical Bulletin.

Okereke-Onyiuke (2009) posits that concentration is the factor that measures the level

of domination of the market by a few enterprises. The significance of concentration as a

measure of performance of stock market is because of the adverse effect it may have on the

liquidity of the market. The share of market capitalization accounted for by the 10 largest

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stocks often measures the degree of market concentration. In Nigeria, a few companies

dominate the market as the market capitalization of the top ten equities listed on the Nigerian

Stock Exchange accounted for about 40 percent of the total stock market capitalization in

1999.

On liquidity Nigeria’s capital markets lack the liquidity needed for a sustainable bond

market that can fund growth and development in the public and private sectors. This

therefore, is a proposal to remedy market illiquidity and provide solution and

recommendations. The economic environment in Nigeria is sophisticated and suitable to

create a sustainable vibrant bond market that can be vital in economic development. The

success of the bond market depends on the collaboration between the market operators and

financial institutions including the Central Bank of Nigeria (CBN), (DMO), Securities and

Exchange Commission (SEC), CBN and the Nigerian Stock Exchange (NSE) must ensure

that regulated bond trading operations in a shadow and little understood repo market

(repurchase agreements) is protected against illicit operations.

Nigeria’s sovereign bonds (debt) have been in existence since the 1970s. However,

the bonds issued then had been illiquid and redeemable only to the Central Bank of Nigeria

(CBN) upon maturity. The DG of SEC revealed that in 2003, the Federal government

returned to the debt market to mobilize funds for long-term capital projects. In the process,

the government effectively championed the creation of an Over-the-Counter (OTC) bond

market by issuing short-term maturity notes.

In addition, the CBN Governor revealed that the Federal Government of Nigeria

(FGN) has issued about four trillion naira (N4.0 trillion) worth of bonds that are supposed to

be trading on OTC market. He said further that the approved budget in 2010 has authorized

the CBN to underwrite for the DMO to raise nearly eight hundred and sixty billion naira

(NGN 868.00 billion). However, these bonds rarely exchange hands and are considered

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illiquid by most of the institutions that purchase them in the primary market at the Primary

Dealer/Market Maker (PDMM) auctions. He reveal further that only recently, a few

municipal governments such as Lagos, Ogun, Rivers, Imo (Issued 2016, 18.5b naira @

15.5%), Bayelsa, and Abia States have either issued or received approval to issue bonds for

long-term capital projects. The total amount of bonds or pending issues is less than five

hundred billion naira (N500 billion). There is no indication that these bonds will be

marketable in OTC market, either.

On Corporate Bonds and Debentures, in the private sector, corporate bonds and

debentures are not often considered as an option by many companies in funding expansion

and innovation. The Group Managing Director of First Bank Plc revealed that his Bank has

received approval from the SEC and has already issued about five hundred billion naira

(N500 billion) worth of bonds dominated in naira currency. He further said that other

companies such as GT Bank, Plc and Access Bank Plc, have issued foreign currency

dominated bonds and convertible bonds respectively. The DG of SEC opined that the total

amount of bonds issued in the private sector is less than one trillion naira (<N1.0 trillion).

Considering the size of Nigeria’s economy, he said, is indeed small and is a reflection on the

inability of companies to issue bonds, secured by their assets or debentures issued on the

strength of their balance sheets to mobilize critical funding outside of the banking system.

The Director General of DMO argued that in 2006, the DMO introduced a PDMM

system to provide at least a two-way quotation or multiple quotations for government bonds

in OTC market. He said the initiative was hailed as a significant development in providing

liquidity in the bond market. He revealed further that enhancement of this PDMM (Primary

Dealer Market Marker) system would have created opportunities for municipal bond

underwritings and eventually, corporate bond underwritings for listing on the NSE. He

argued however, that lack of repos to help primary market dealers to manage their liquidity

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and finance inventories became a major setback in trading bonds in the secondary market. He

submits that ideally, as envisioned by the DMO, the twenty one (21) registered members of

the PDMM syndicate were/are supposed to support the secondary market for bonds by

placing bids as principals (take in the bonds for their inventory) or as brokers (buy and fill

orders for clients at a commission/mark-up) anytime a bond investor tenders bonds for sale.

Without repos, an overnight or short-term borrowing, to provide liquidity in the market, an

active bond market is improbable he said.

On the Bond Market Liquidity the DG of SEC argue that the OTC market can be as

active and liquid as the equity market if the local investment community understands the

critical role the market plays in the economy and more important, the stability that the

investment product provides to a managed portfolio. He however, argue that there is a

misunderstanding of the product and the market by many investors including big institutional

portfolio managers, pension fund managers, endowment administrators, public accountant

generals, corporate chief financial officers, and private wealth bankers. He submits further

that unfortunately, even principals/agents of some PDMMs don’t fully understand the nature

of these investment products.

According to him, the repo market is the life line of the Treasury securities trading.

Repos play a central role in providing liquidity for the vibrant trading and financial of

Treasury securities. Without repos, it’s hard for PDMMs to generate enough liquidity to own

assets on their books and take advantage on new opportunities in the market place. Repos

provide the liquidity for traders to take risk in trading assets from low yielding investments to

high yielding opportunities. Many PDMMs have reported holding FGN bonds in their

portfolios for substantially longer periods than planned due to lack of marketability for

certain bond series. Others have expressed frustration in holding bond inventories that

ordinarily would have been traded for other opportunities in the capital market.

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On Bond Market Liquidity Constraints, the CBN Governor argued that the causes of

tightened liquidity in Nigeria’s economy in the past three years have largely been self

inflicted by misinformed CBN’s monetary policy and the banking industry’s greed to be

dominant capital market operators and formidable commercial banks. The monetary policy

rates he said, in the past three years has frozen liquidity in the bond market and created a

huge gap in the federal debt management program that even the strongest capitalized banks

have been struggling to maintain reserve requirements and liquidity ratios with creative book

keeping and questionable lending practices as the recent bank audits have demonstrated.

The CBN governor posited further that the banking industry’s greed had pushed many

banks into bogus under-writings of Initial Public Offers (IPO) of securities of their own

competitors as a way to create wealth for the principals and insiders of the organizations. The

banks had liquidity for legitimate business investments that would have recorded the greatest

economic expansion of all times in Nigeria, but they chose to extend huge loans to favored

customers and clients for pre-IPO share purchases. He further said that the loans did not have

much impact on the overall economy, except to generate more wealth for the people that were

already wealthy.

He submits that from 2006 to 2008, the Central Bank focused narrowly on stabilizing

the value of the naira relative to foreign currencies and holding down inflation. The inability

of the CBN to manage short-term interest rates crowded out private capital in the massive

economic expansion that the Nigerian economy had enjoyed in five consecutive years he

opined. According to him, the DMO’s excellent ground breaking initiatives to manage

government’s deficit financing for capital projects, drained the much needed capital in the

private sector through debt auctions as coupon rates that were not synchronized with the

CBN’s monetary policy targets. The liquidity crunch in his view, in the capital markets was

caused partly due to the CBN’s monetary policy rates and exchange rate regimes that favored

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the twelve biggest banks that were also the largest participants in treasury securities auctions.

Actually he said, it can be argued that the DMO’s ongoing deficit financing initiatives in an

uncoordinated monetary policy regime by the CBN over exposed the expanding economy to

external shock that led to a panic sell off in the stock market by insiders which led to a

market meltdown.

On The Price of Capital, the CBN governor believes that the haphazard pricing of

capital in the economy has confused and continue to baffle even the most sophisticated

investors in Nigeria’s capital market. The idea that capital can be best invested in shares of

financial institutions rather than in the real sector of the economy, made many analysts to

wonders where the true foundation of the economy lies. Many banks extended margin loans

and over leveraged their assets by diverting liquidity from long-term investments that would

have been more meaningful for the real sector of the economy to artificially inflated stock

prices. Furthermore, investors in Nigeria’s capital market have not have real alternatives in

asset allocation due to lack of investment products in the equity market on the one hand and

sloppy CBN’s monetary policy rates for short-term money market rates and fixed income

securities on the other hand. The CBN’s interest rate policy has rarely had any impact on the

direction of capital movement. The wide discrepancies in interest rates ranging from the

treasury bills to treasury notes/bonds auctions, to monetary policy targets, to inter-bank

lending offer rates, to prime rates, to consumer lending rates, etc… have many rational

expectations a luxury consideration for serious investors. Simply, economy forecast of

leading indicators like inflation, employment, consumer sentiments and investments are often

hard to compute. As a result, investors and traders do not, very often consider allocation of

assets based on trends in the economy. The exchange rates and crude oil prices, the only true

measurable indicators win consideration at all times in asset allocation.

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In addition, just as repos are vital for a vibrant bond market, interest rate policy plays

even a more important role in bond trading. Since there is an inverse relationship between

bond prices and interest rates, and since bond yields move in opposite direction to prices,

bond traders need some signals from the CBN about the direction of interest rates so that they

can calculate the risk factors associated with making fixed income investments versus long-

term wealth creation and/or preservation investments.

Bond Trading and Repos, the CBN governor posits that one of the most important

sources of mobilizing funds for development is by issuing bonds. Bonds are “I Owe You’s”,

generally called IOUs (debt) that are issued by the Federal and Municipal governments, and

corporations to mobilize funds to manage infrastructural development. Bonds are issued in

tenors (maturities) of three, five, ten and twenty years long. A bond is a debt instrument that

must be paid back with interest at a future date by the issuer or borrower. When a borrower

issues a bond, it must be priced with coupon rate based on the prevailing interest set by the

CBN’s monetary policy rates. In the case of a municipal government, the rating of the

municipality also factors in the interest rate pricing of the bond. The longer the tenor of the

bond the higher price (interest) the lenders of money to the borrower expect to be paid and

vice versa for the shorter maturities. The borrower pays the lender periodic interest, usually

every six months, on the bond until the bond matures and at that time, the final interest and

principal are paid back to the lender. In reality, no lender (bond investor) of money to the

bond issuer (borrower) wants or expects to hold the bonds they have bought for the entire

duration to maturity, regardless of how short the tenor is.

Therefore, bond trading becomes very important in the capital market. Since the bond

market is very sensitive to interest rates (the main determinant for prices and yields on bonds)

and other economic management factors such as inflation, unemployment and economic

growth the CBN’s policy plays a significant impact on the stability of the bond market. Just

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as margin trading is important in equity investing, repos are the life line of bond traders.

Repos provide opportunities for PDMMs and smaller bond traders to manage liquidity and

take risk in portfolio asset allocation.

Repos or Repurchase Agreements

Repurchase agreements are constructs for the sale and future repurchase of a financial

assets, especially treasury and municipal securities that are used to collateralize the loan. For

example, a bond trader can buy treasury securities and simultaneously collateralized the

securities in an overnight repo deal as he looks for someone to sell the securities to at a profit.

These assets are bought and sold in hundreds of millions of naira per transaction. Most buyers

of these assets do not intend to hold the assets for the entire life to maturity. Many investors

buy these assets because they are the safest investments to back cash at a decent return while

waiting for spending budgetary allocations. Other investors choose these assets for tax

purposes and as they are stable fixed income, especially at a time that inflation is not a threat

to the erosion of purchasing power. Holding these assets in inventory for trading requires

huge amounts of money for bond traders. Therefore, bond traders need repos with such

institutions as the CBN, municipal governments, banks, insurance companies, large

companies, government corporations and wealthy individuals to be able to buy and sell bonds

as supply and demand detects in the market place.

Overnight term repos provide liquidity to bond traders to buy and sell hundreds of

millions of naira worth of bonds from other dealers or sellers. In a repo deal, the bond trader

specifies in the agreement the sale price, the repurchase price, the interest rate, and the

termination date. If the agreement is valid for only twenty four hours, it becomes an

overnight repo. If it rolls over to another day and several more days, it becomes a term repo,

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however. On the termination date, the bond trader repurchases the assets at the same price at

which he sold it, and pays interest for the use of the funds.

Repos are short-term interest bearing collateralized loans for usually high grade

interest bearing paper, such as treasury securities and municipal bonds. The liquidity of the

bond market depends on the liquidity of repos. If regulated well, repos provide an opportunity

for financial institutions including, banks, thrifts (saving and loans), microfinance, pension

fund managers, and insurance companies, to invest their surplus funds in overnight lending

just like the inter-bank lending offer rate that is restricted to only banks. Overnight repos

provide yield enhancement opportunities to professional assets managers at almost no risk to

client’s assets.

4.2.1 The Global Financial Crisis hindered the Administrative Efficiency of the Nigerian

Capital Market in Mobilizing Long-Term Funds for national Development

The global crisis had its origin in the United States sub-prime mortgage crisis of 2007.

By the first quarter of 2008, many financial institutions in the US had tightened credit

standards in view of deteriorating balance sheets. By the third quarters of 2008, the increased

sub-prime loans delinquency had not only culminated in the loss of confidence in the US

financial system, but also escalated and spread like wildfire through complex and poorly

misunderstood financial linkages to the rest of the world’s financial centers. Consequently,

many large US corporations failed, with the attendant contagion effects transmitted all over

the globe, resulting in output decline, credit freeze, inventory pile-ups, job losses and the

ultimate bankruptcy of many global financial institutions. For developing/emerging

economies, including primary-export African economies, the inevitable effect of output

decline in the BRIC (Brazil, Russia, India and China) and the advanced countries resulted in

persistent decline in commodity prices, including oil prices, which fell precipitously in the

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face of declining demand and an induced significant drop in earnings. In addition, the global

financial crisis traumatized the credit and equity markets, as it triggered substantial foreign

investments and portfolio outflows, owing to spontaneous global deleveraging by investors

(www.cbn.gov.ng).

4.1.2.2 Effects of the Global Recession on the Nigerian National Development

The effects of the global downturn on the Nigerian economy reflected its high degree

of dependence on the external sector. The crisis was strongly felt in the external-related

sectors and spilled over to other sectors of the economy. With a mono-product economy that

depends largely on the export of crude oil for the bulk of government revenue, Nigeria

became vulnerable to adverse developments in the international oil market, particularly as oil

demand and prices became very volatile and nose-dived substantially. The CBN governor

argued that, the price of Nigeria’s premier crude (Bonny Light) dipped from USD 147.0 per

barrel in July 2008 to less than USD 40.0 on December 2008, before rising again to about

USD70.0 on December 2009. He further said that on an annual basis, the average price rose

from $74.96 per barrel in 2007 to $101.2 in 2008, but dipped to $62.1 in 2009. He submits

that export value fell persistently, from 1.7 million barrels per day (mbd) in 2007 to 1.5mbd

and 1.4 mbd in 2008 and 2009, respectively. Oil revenue exhibited a similar trend at N5.3

trillion, N4.56 trillion, N6.53 trillion and 3.19 trillion in 2006, 2007, 2008 and 2009,

respectively. Furthermore, the negative developments in the oil sector culminated in a

substantial decline in revenue to the federation which the government tried to address with a

massive drawdown on the excess crude revenue account to smooth public expenditures

(www.centralbanknigeria.com).

Still on the Nigerian external sector, the CBN governor said that the global financial

crisis resulted in loss of external competitiveness, reduction in financial inflows especially,

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Foreign Direct Investments (FDI) and portfolio investments as investors scrambled to safety

to cushion the impact of the downturn on their home positions. In addition, inward

remittances plummeted as countries imposed restrictions and as employment opportunities

dipped in the diaspora, rendering jobless many Nigerians who had hitherto remitted money to

the economy, portfolio engagement and capital by the foreign investors exacerbated pressure

on the foreign exchange market and the large funding of the foreign exchange demand led to

a significant drawdown on external reserves, which in turn affected the Balance of Payments

position of the country. Thus, the exchange rate of the naira depreciated widely from about

N117.00/US$ in 2007 to N181.00/US$ at end-December 2008. The observed depreciation of

the naira was accentuated by the adverse terms of trade occasioned by price movements in

the international oil market (www.centralbanknigeria.com).

The CBN governor was of the view that though the effect of the global recession

threatened financial stability in the advanced economies, the ramifications on Nigeria’s

financial system was limited, owing to its minimal integration into the global financial

landscape. In this regard, the impact of the crisis on the financial sector was pronounced until

the third quarter of 2008 when the stock market was rattled and it registered a continuous

drop in its All-Share Index and volume of traded securities at the Nigerian Stock Exchange,

with the market capitalization plunging from N13.3 trillion in 2007 to N9.5 trillion in 2008

and further to N7.0 trillion by end – 2009 (www.centralbanknigeria.com).

He posits that the banking sector has recorded a significant assets decline of about

39.8 percent as the crisis that had engulfed the capital market led to higher loss provisioning

by banks, much lower profits and slump in lending to the private sector. The governor further

said that the banking subsector also registered a decline in trade/credit lines from foreign

banks, as more credits were recalled or cancelled in the heat of the crisis within their own

domestic economies. This development according to him significantly constrained the ability

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of the domestic banks to extend credit to the real sector of the economy, while the interest

rate spreads increased further.

According to the CBN governor the global economic meltdown, which persisted until

2009, caused significant declines in real output growth in some sectors and the general

economy. The total industrial production index fell from 119.4 in 2007 to 117.8 in 2008, but

recovered modestly in 2009 as the economy toed the line of recovery. The GDP growth rate

according to him declined from 6.5 percent in 2007 to 6.0 percent at the onset of the crisis in

2008, but rose to 6.7 percent in 2009. He said that the adverse effect of the global crisis on

the GDP remained noticeable in the areas of agriculture, industry and the wholesale sub-

sectors. Accordingly, the building and construction sub-sector was not adversely affected as

it grew marginally during the period under review. The level of liquidity available for the real

sector activities was hindered by the global financial crisis. Thus, domestic credit (net) to the

economic grew by 59.0 percent at end December 2009, which was below the target of 66.0

percent and the growth of 84.2 percent recorded in 2008 (www.centralbanknigeria.com).

The global aggregate prices were depressed during the crisis, the large depreciation of

the naira exchange rate, vis-à-vis the US dollar, contributed to the hike in the cost of imports,

increase in the cost of production and loss of competitiveness by Nigerian industries. The

export market was depressed as some manufacturing companies and multinationals relocated

to neighboring countries and engaged in re-imports to Nigeria. This was as a result of the

high cost of production in the country he said. The development has worsened the state of

unemployment in the country, which rose from 10.9 percent in 2004 to 12.8 percent in 2008

and 12.9 percent in the 2009. The consumer price index (CPI) showed significant variations

at the onset of the crisis. The CBN governor said that the Year-on-Year inflation rate rose

sharply from 6.6 percent in December 2007 to 15.1 percent in the last quarter of 2008, but

moderated to 12.0 percent in the last quarter of 2009, owing to relative stability in the

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exchange rate. However, the effect of the crisis remained high in the food component of the

CPI, although it dropped significantly in August 2007 to minus 1.2 percent and later rose to

17.1 percent in September 2008, and subsequently to 18.0 percent in 2009

(www.centralbanknigeria.com).

The CBN governor put the global output declined by 0.8 percent in 2009, in contrast

to an increase of 3.0 percent in 2008. The development he said was attributed to the fall in

economic activities in the advanced economies, Central and Eastern Europe, the

Commonwealth of Independent States (CIS) and the Western Hemisphere countries, whose

output declined by 3.2, 4.3, 7.5 and 2.3 percent respectively. The decline was moderated by

the increase of 1.9, 6.5 and 2.2 per cent recorded by Africa, Developing Asia and the Middle

East respectively. Accordingly, the contraction in world economic activity was occasioned by

low domestic demand in the advanced economies as well as weak exports of emerging and

developing economies. By the second half of 2009, however, global production began to

recover owing to the extraordinary support measures by governments across the globe. The

measures which included cuts in policy interest rates by central banks in order to inject

liquidity into the system, the adoption of unconventional measures to sustain credit flows in

the economy, the introduction of several fiscal stimulus packages and guarantees, as well as

capital injections. The effects of these combined actions help to reduce uncertainty and

increase confidence in the financial markets, thus, fostering improvements in the global

economy. The US Treasury intervened through a number of measures which included fiscal

and financial stimulus packages to inject new funds, the Troubled Asset Relief Program

(TARP) and an initiative to purchase US$1.25 trillion agency backed securities. In addition,

the Federal Reserve maintained the Federal funds target rate within a range of 0-0.25 percent,

in order to stimulate credit expansion in the economy.

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In addition, Japan also experienced a substantial decline in output growth which

contracted by 5.3 percent in 2009, compared with a fall of 1.2 percent in 2008. He said the

deceleration was due to the decline in its manufactured exports, particularly automobiles, and

weak domestic demand. In the Euro area, weak domestic demand and decline in the demand

for the region’s export caused output to decreases by 3.9 percent, as against the 0.6 percent

increase realized in 2008. The concerted efforts of both the fiscal and monetary authorities to

promote growth in the region, including fiscal and financial stimulus packages, the purchase

of toxic assets and the maintenance of low interest rates to enhance credit expansion failed to

engender the desired growth.

The CBN governor said that the output in the Western Hemisphere contracted by 2.3

percent, down from an expansion of 4.2 percent in 2008. This is attributable to the sharp fall

in domestic demand and exports, occasioned by the tighter external financing conditions and

lower worker remittances in most countries. The decline in economic activities, however,

varied across the region and greatly depended on the nature and intensity of the external

shocks and country-specific characteristics. In response, a number of economies in the region

adopted policy measures to mitigate the effects of the shocks. Such measures include the

implementation of counter-cyclical monetary and fiscal policies, making the financial sector

more resilient, and using the exchange rates as a shock absorber.

Furthermore, economic performance in Central and Eastern Europe was also weak as

output fell by 4.3 per cent in 2009, in contrast to an increase of 3.1 percent in 2008. He said

that all the countries in the region, with the exception of Poland which reported an output

growth of 1.0 percent, recorded negative growth rates. Again, the slowdown was largely

traced to the decline in cross-border funding and a weak private sector, especially household

demand, following the global economic recession.

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Developing Asia countries maintained its positive growth path, but at a lower rate, as

output rose by 6.2 percent in 2009, compared with 7.9 percent in 2008. The growth in output

was linked to the aggressive expansionary fiscal and monetary policies adopted by most

countries within the region; a rebound in financial markets and capital inflows, which eased

financing constraints for smaller export enterprises, and improved consumer and business

confidence; and a positive impulse for industry, following large inventory adjustments.

Tension in the financial markets eased and the decline in domestic demand moderated, while

strong demand was experienced, especially in China and India, output in the countries of the

Commonwealth of Independent States (CIS) contracted by 7.5 percent in 2009, in sharp

contrast to the expansion of 5.5 percent in 2008. This development he said owed much to the

severe negative impact of the global recession. The Russian economy decline sharply by 9.0

percent in 2009, as against the 5.6 percent it increased in 2008. With the pervasive

dependence on Russia for remittances and export earnings, many countries in the region

witnessed depressed domestic demand.

In Africa, output growth was modest at 1.9 percent in 2009, compared with 5.2

percent in 2008. The significant slowdown resulted from weak demand and depressed

commodity prices, as well as the effects of the global meltdowns on its financial markets.

The impact of the global recession was initially felt through South Africa, whose economy is

highly integrated with the global financial markets. Weak global trade, underpinned by

decline in financial flows, adversely affected the region’s oil exporters (Algeria, Angola,

Libya and Nigeria), manufacturing exporters (Morocco, Tunisia), and other commodity

exporters (Botswana). The GDP growth in oil-exporting countries decelerated from 5.0

percent in 2008 to 1.5 percent in 2009, with that of South Africa, the largest economy in the

region, declining by 2.1 percent. Nigeria, however, recorded an impressive output growth

estimated at 6.9 percent.

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4.1.2.3 Global Inflation Effect on the Nigerian Capital Market

The CBN governor argued that the global consumer prices moderated for most part of

2009, as inflationary pressures remained low, which he attributed to the weak global demand.

However, he said the Commonwealth of Independent States (CIS) and Venezuela recorded

the highest inflation rate of 11.8 and 29.5 percent, respectively, traceable to currency

devaluation and low remittances, huge public spending and the easing of monetary policy.

According to him across the global economy, the moderation in inflation was uneven, with

the inflation rate subdued more in China and Middle East than in other regions.

In the advanced economies, headline inflation moderated to 0.1 percent, from 3.4

percent recorded in 2008. The US headline inflation improved by 4.2 percentage points from

3.8 percent in 2008 to negative 0.4 percent, in 2009. Japan entered deflation as its headline

inflation fell from 1.4 percent in 2008 to negative 1.1 percent. In the Euro area, headline

inflation decline to 0.3 percent from 3.3 percent in 2008. Also, in the United Kingdom,

headline inflation also fell by 0.4 percentage point, to 1.5 percent. The moderation in inflation

was facilitated by a number of factors which included central banks implementing a usually

large policy rate cuts to combat the recession and intervening in the credit and assets markets

to ease the financial conditions.

The Western Hemisphere economies, headline inflation declined to 6.1 percent, from

7.9 percent in 2008. The moderation in inflationary pressures in the region was attributed to

the continued weakness in economic activity. Inflation, however, remained at double digit in

Venezuela (29.5 percent) as a result of huge public spending and a lax monetary policy he

said. The inflation-targeting countries (Brazil, Colombia, Chile, Mexico, Peru and Uruguay)

where inflation raised above their targeted range (2-5 percent), policy rates were raised as

part of the efforts to subdue inflation (www.centralbanknigeria.com).

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The CBN governor argue that in the developing Asian economies, headline inflation

declined to 3.0 percent, from 7.5 percent in 2008, with all the countries in the region

contributing to the decline. The response to the moderation in inflation varied across the

region he said. Extensive fiscal and monetary support helped ease tension in financial

markets and softened the decline in domestic demand in China and India. Central banks

provided ample liquidity and lowered policy rates in India, Indonesia, Korea, Malaysia, The

Philippines, Taiwan Province of China and Thailand. Pakistan, however, witnessed higher

inflationary pressures as its headline inflation rate rose from 12.0 percent in 2008 to an

estimated 20.8 percent he said (www.centralbanknigeria.com).

For the CIS, headline inflation decline to 11.8 percent, from the 15.6 percent recorded

in 2008. Governments in the region were faced with the major challenge of striking the right

balance between domestic and external stability. Consequently, policy measures, such as

currency devaluation and a tight monetary policy stance were adopted to contain inflation.

In Africa, inflation also decline to an average of 9.0 percent, from 10.3 percent in

2008. However, three economies (Democratic Republic of Congo, Ethiopia and Seychelles)

recorded inflation rates of more than 20.0 percent. In contrast, a majority of the economies

belonging to the CFA franc zone and the Magreb region had estimated inflation rates of less

than 5.0 percent. To ease the inflationary pressures he said, central banks in countries with

high inflation rates pursued tight monetary policies, while those with low inflation employed

expansionary monetary policies to stimulate aggregate demand

(www.centralbanknigeria.com).

4.2.4 Global Commodity Demand and Prices on the Nigerian Capital market

The CBN posits that global commodity demand and prices recovered modestly in

2009, despite the generally high levels of inventories, but failed to reach the pre-crisis level.

The recovery was attributed to the buoyant recovery in Asia and other emerging and

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developing countries, as well as improvements in global financial conditions. World oil

output dropped by nearly 2.0 million barrels per day (mbd), falling from 86.3 mbd in 2008 to

about 84.3 mbd. Global oil demand also contracted in excess of 1.0 mbd between the fourth

quarter of 2008 and 2009. Oil demand by the Organization for Economic Cooperation and

Development OECD) countries declined from 47.6 mbd in 2008 to 45.4 mbd, while the

demand by non-OECD countries rose marginally from 38.7 mbd in driven by the low demand

from the advanced economies, particularly the United State and Japan.

The persistent weak demand forced the Organization of Petroleum Exporting

Countries (OPEC) to implement a series of production cuts to shore up prices. In response to

the economic recovery and the OPEC actions, global oil prices moved from a low US$ 36.0 a

barrel on February 27, 2009 to an average of US 70.0 per barrel by mid-year and stabilized

around that price for the rest of 2009 (www.centralbanknigeria.com).

4.2.5 World Trade Effects on Nigerian Capital Market

The CBN revealed that the aggregate global trade declined by 15.1 percentage points

to negative 12.1 percent, from 2.8 percent in 2008. In the advanced countries, both exports

and imports decline by 12.1 percent and 12.2 percent, respectively he said. Export and import

trade in emerging and developing countries declined to negative 11.7 and negative 13.5

percent, respectively in 2009, in contrast to the increase of 4.4 and 8.9 percent in the

preceding year. The CBN attributed the substantial decline in the volume of trade to the

global economic recession (www.centralbanknigeria.com).

4.2.6 International Financial Markets effects on the Nigerian Capital Market

The CBN argue that the global financial markets recovered faster than expected in

2009, after reaching their troughs during the global economic and financial crises. The

recovery was spurred by improved economic conditions and sustained public policy support,

which helped restore confidence. According to the bank, for most of 2009, financial markets

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were largely stable, except for the slight volatility of prices in the capital market experienced

in the fourth quarter, a consequence of the request by Dubai World for a debt repayment

standstill and announcements by credit rating agencies of the sovereign ratings of a number

of European countries. Equity prices rose in most of Europe and the US, although they

remained below the pre-crisis peak in the UK. Despite the improvements, financial stability

remained fragile in many of the developed and emerging economies, especially those hard-hit

by the global financial meltdown (www.centralbanknigeria.com).

4.2.7 Money Markets and the Nigerian Capital Market

The CBN observed that the liquidity squeeze that accompanied the global financial

crisis led to increased risk-aversion and uncertainty, thus affecting the pricing of risk

throughout the global financial system. This resulted in increase in interest rate that spreads

on riskier assets, such as corporate bonds, in some developing and developed countries. This

spreads in developing countries remained high, as the base rates declined, in response to the

easing of monetary policy in the advanced economic. Despite near zero interest rates in

advanced countries, the cost of credit in developing countries increased and in some cases

doubled, leaving potential effects on debt sustainability and the profitability of future

investments. Although most banks were less reliant on central bank facilities and guarantees,

the need to rebuild their capital remained a major challenge (www.centralbanknigeria.com).

The financial market occupies an important place in most economies of the world.

The primary function of a financial market is to enable funds to be efficiently allocated from

the surplus unit of the economy to the deficit units of productive investment. The greater the

transmission efficiency is, the higher the growth rate of the economy. The financial market is

a mechanism by which surplus and deficit units of an economy can be brought together.

Specialist traders operate in this market by buying and selling financial claims. The functions

of financial markets are as follows.

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It eases the flow of funds from the surplus units to the deficit units, thus, ensuring

efficient allocation of resources It facilitates the issue of instrument or securities of varying

maturities. It facilitates the transformation of maturity of financial instruments. It facilitates

the growth rate of the economy. It allows investors the opportunity to invest in a wide range

of enterprise, thus, allowing them to spread risk. It offers the participants the opportunity to

reduce risk through counterbalancing contracts to offset existing risks. Counterbalancing

contracts in financial market includes forward contract, option contract and future contract.

The financial market has two segments

The primary market: This is the market for new issue of funds or securities. It provides a

focal point for lender and borrowers to meet. We raise new finance in this market.

The secondary market: this is the market that allows the existing holders of financial claim to

sell them to other investors. Thus, it provides liquidity for financial claims in the primary

market.

The major financial markets in Nigeria offering primary and secondary markets are of

two types:

The money market: This is the market for funds of less than one year duration. Instruments

traded in the market are called money market instruments.

The capital market: This is the market for funds of more than one year duration.

Instruments traded in the market are called capital market instruments.

The money market: The money market is the market where money is borrowed or invested

for a period of up to one year maturity. The instrument or securities traded in the market are

called money market instruments. Thus, the money market is the market for trading in short

term financial instruments with maturities of less than one year. The major participants in the

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money market include individuals, companies, banks discount houses and government. The

money market has both primary and secondary segments. In Nigeria, the discount houses and

the central bank of Nigeria rediscount windows enhanced marketability of some money

market instruments in the secondary market. There are several instruments available through

which funds can be raised in the money market. The use of the instruments varies from

country to country and often depends on the development on the economy. The instruments

used in the Nigerian money market are as follows;

Treasury securities

These are short term obligations of the federal government to pay the bearers a fixed

sum of money after a specified number of days from the day of issue. The Central Bank of

Nigeria auctions the instruments for the treasury at a discount through competitive and non-

competitive bidding. The two types of treasury securities in Nigeria are treasury bills and

treasury certificate.

Treasury Bills are 91-day discount obligations of the Federal Government. The return of

the bill is the difference between the face value and purchased value of the instrument. The

issue of treasury bills was made in Nigeria in February 1960. Prior to 1989, treasury bills

were sold at a fixed discount rate fixed by the Central Bank of Nigeria. As part of the policy

of the Government on deregulation of interest rates in 1989, the Central bank of Nigeria

introduced auction based system in the issuance of treasury bills. The treasury bills are issued

in the multiples of #1000 subject to a minimum of #10,000. Application for the bills is open

to members of the public who can tender for bills through the authorized dealers. There are

the commercial and merchant banks. The banks can submit tenders either for themselves or

for the members of the public. The public debt office of the central bank of Nigeria offers

bills for tenders under competitive or non competitive bidding. For the competitive tender,

prices must be expressed on the bases of per (#100) up to a maximum of three decimal

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places. Non competitive tenders are accepted in full at the average price of accepted

competitive bids. This is an additional percentage equivalent to the difference between the

face value and the purchase value.

Treasury Certificate is Federal Government obligations that have maturities of one or

two years. The instrument was introduced in Nigeria in 1989 to bridge the maturity gap

between the short tenured Treasury bills and long tenured Development stocks. The Treasury

certificates are similar to Treasury Bills in all respects except on a discount basis. Both the

treasury Bills and Treasury Certificates are considered part of the liquid assets of banks in the

computation of their liquidity ratio.

2. Certificate of deposits

A certificate of deposits (CDS) is a receipt from a bank for deposit of funds for a

specific period of time at a specific interest rate. CDS was introduced in Nigeria in 1975 by

the Central Bank of Nigeria as one of the measures for a mopping up liquidity in the

economy during the oil boom period. It is an inter-bank debt instrument and serves as a

means for channeling commercial banks’ cash surpluses to merchant banks that are the main

issuance of the instrument.

There are two types of certificates of deposits: Negotiable Certificates of Deposits

(NCD) and Non-Negotiable Certificates of Deposits (NNCD).

Negotiable Certificate of Deposits is a promise by a bank to pay the principal and

interest at the maturity of the deposits. It is a negotiable instrument which has a maturity

range of 3 and 36 months. Banks apply to the central Bank for the amount of their liabilities

they want to carry as Negotiable Certificates of deposits. NCDs with a maturity of less than

110 months are included in the liquid assets of banks in the computation of their liquidity

ratio. Such NCDs are eligible for rediscount of the Central Bank Discount Window. Unlike

other countries like United States of America, etc. a secondary market for Negotiable

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Certificates of Deposits is yet to develop in Nigeria. Being a negotiable instrument, an

investor in NCD can dispose off the investment before the maturity of the instrument the

development of a secondary market on the instrument will enhance its attractiveness to

investors.

Non –Negotiable certificates of deposit (NNCD) have features of a time deposit

receipt. As they are not negotiable, they are normally held to maturity. They are not a very

popular market instrument in Nigeria; the maturity range is also between 3 and 36 months.

3 Commercial paper

A commercial paper is a short term unsecured promissory note issued by a company at a

discount to an interested investor for cash for a specified maturity period. The investor in CPs

are usually high net worth individuals institutional investors such as pension funds, insurance

companies banks etc. commercial papers have a maturity range of 30 days and 270 days

commercial notes with maturity of more than 270 days are required by the security and

exchange commission decree of 1988 to be registered with the security and exchange

commission. The return on the notes is the difference between the face value of the note and

the purchase value. Because promissory notes are unsecured obligation and bear only the

name of the borrower, the commercial paper market is dominated by large publicly quoted

companies with very good credit ratings. Ideally only companies that can borrow in the loans

market without security or with a negative pledge can be accepted by investors in the

commercial paper market.

Commercial papers are categorized into two classes; Dealer papers and directly

placed papers. Dealer papers are commercial notes placed with investors through a dealer

which may be a bank, a stock broking firm or a finance company. Directly placed paper are

commercial notes placed directly with investors by the company issuing the promissory note.

To date, most commercial papers traded in Nigeria are dealer papers. This is because direct

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placement requires the issuing company to maintain an outfit with trained personnel who

have a good knowledge of the money market and have good contacts in the market. The

benefits to be derived from direct placement may not worth the effort. The only Directly

Placed Papers in Nigeria are bank papers. Bank Papers are commercial papers issued by

banks. These are promissory notes issued by banks to interested investors. There is no

secondary market for commercial papers in Nigeria and other countries.

4. Bankers Acceptances

A banker’s acceptance is a bill of exchange or draft accepted by the drawee bank

specifying that a certain amount will be paid after a specified period of time. The drawee

bank accepts the draft by writing on the draft word “accepted” with the appropriate

authorized signature across the face of the draft. By the acceptance, the drawee banks

acknowledge its obligation to honour the draft on the due date. With the acceptance, the bill

of exchange or draft can be discounted by the payee at a fine rate of discount. The instrument

becomes a desirable credit instrument since it is now the obligation or the liability of the

bank. The drawee bank is paid a fee for endorsing its acceptance on the draft. The acceptance

fee is often equivalent to the commission payable to the bank for giving its guarantee.

Banker’s acceptances are used for the financing of international trade through letters of

credit. It is also used for the financing of commodities trade especially with respect to bonded

warehouse. The credits created through banker’s acceptance are self liquidating short term

credits. The maturity period ranges between 30 days and 270 days. The most common

maturities are 90 and 180 days. Banker’s acceptances have lower credit risk than commercial

papers as they are secured credit. Consequently, they enjoy lower rate discount than

commercial papers.

At the moment, there is no secondary market for banker’s acceptances in Nigeria. The

instrument is not eligible for rediscounting at the Central Bank of Nigeria Discount Window.

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Investments in bankers acceptances do not count as the liquid assets of banks in the

computation of their liquidity ratio, rather is regarded as part of their loans and advances. The

above factors are responsible for the wide differential between the rate of discount on

treasury bills and rate of discount on banker’s acceptances.

5. Eligible Development stocks

Investment in Federal Government of Nigeria Development Loan Stocks and State

Government Development Bonds and Stocks of less than 3 years maturity is regarded as

liquid assets of a bank in the computation of its liquidity ratio.

A secondary market exists for the securities as they are quoted on Nigerian Stock

Exchange. New issue of these instruments are really capital instruments, thus, they can be

regarded as long term debt instruments.

6. Bank deposits

This is a placement of funds by investor/depositors with a bank at an agreed rate of

interest. There are various types of bank deposits and they are differentiated by their

maturities via:

Call deposits: This is a deposit of funds made with no special maturity period. Either the bank

or the depositor can terminate the arrangement by giving the other party due notice based on

the agreed notice period. The recall notice can be 24 hours, 7 days, 1 month etc. the rate of

interest applicable on the deposit is normally agreed upon between the bank and the call

depositor.

Fixed Deposit: This is a deposit of funds with a bank for a fixed period of time at a

specified rate of interest which could be fixed or floating. In the case of a floating rate

deposit, the interest rate will be linked to a base rate which could be the prime lending rate of

the bank or the Central Bank of Nigeria Minimum Rediscounting rate. The maturity of the

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deposit can vary from a few days to any number of years. The deposit may or may not be

certified with a deposit receipt or certificate.

The main components of the Nigerian money market are the discount market and the

interbank market.

The Discount Market

This is the market which trades instruments eligible for rediscount at Central Bank of

Nigeria. The market is organized by the discount houses and other members of the money

market Association of Nigeria. The instrument being traded in the market is currently limited

to treasury securities.

4.2.8 CAPITAL MARKETS AND ADMINISTRATIVE CHALLENGES

CONFRONTING THE NIGERIAN CAPITAL MARKET IN MOBILIZING LONG-

TERM FUNDS FOR NATIONAL DEVELOPMENT IN THE COUNTRY

The increased risk aversion, a re-assessment of growth prospects, and the need for

firms and investors in high-income countries to strengthen their balance sheets, resulted in

large scale repatriation of capital from developing to advanced economies. As a consequence

global stock markets lost between 50.0 and 60.0 percent of their values in dollar terms,

resulting in a massive loss of global wealth. The improved expectations on the health of the

international banking system (in the wake of the -20 London Summit and other measures

undertaken by the U.S. Treasury) and the enhanced confidence that the global economy

might recover in the near term, stock market valuations gradually regained lost ground in the

later part 2009. By end-2009, all major equity markets, which had recorded significant

declines in their activities by mid March, rebounded with corporate bond issuance reaching

record high levels by end- December 2009. The equity market rebounded; the surge in

corporate bond issuance did not offset the reduction in bank net credit to the private sector,

especially to such vulnerable groups as small and medium-size enterprises and

household/consumer units (www.centralbank nigera.com).

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The empirical evidence indicated that market capitalization affects economic growth

causally. I.e. the causality runs from market capitalization to economic growth. By

implication when there is an increase market capitalization more funds are made available to

entrepreneurs to finance their business thereby leading to economic growth. Also, the

negative relationship that was established between GDP and Value of transaction in Nigeria

could be attributed to high transaction cost in the Nigerian Capital market. The implication is

that investors in Nigerian capital market are low level investors that buy short and sell short.

The impact of institutional investors is not yet felt in the capital market (Ogbo and Oladipo,

2012).

The capital market is the market for a long term funds. The instruments or securities

traded in the capital market are called capital market instrument. However, capital market has

both securities based segments (the stock market i.e., the stock exchange) and non-securities

based segment (market for long term funds). Capital market instruments can be categorized

into three major groups of securities (1) Debt Instruments (II) Preference Shares and (III)

Ordinary Shares

Debt Instrument

Debt instruments are long term loans raised by a company or government

organization for which interest is paid at a fixed rate. A debt instrument has a nominal value,

which is the debt owed by the issuer, and the interest is paid at a stated coupon rate on this

amount. For example if a company issues 12% loan stock, the coupon rate will be 12% of the

nominal value of the stock, so that #1000 stocks will receive #120 interests. Debt instrument

issued by a company are usually evidenced in form of debentures (or bonds in United States

of America). Debt instrument issued by the government can also be in form of bonds. In

Nigeria, Federal Government debt instrument are evidence in form of Federal Government

Development Loan Stock. Whatever the form the debt instrument takes it an evidence of

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indebtedness of the issuer specifying the right of the holder and the duties of the issuer. Debt

instruments are usually redeemable. This does not mean that we don’t have irredeemable debt

instruments. However, irredeemable debt instruments are uncommon in Nigeria.

Preference shares

This is another major source of long term financing to a company. The holder of

preference shares are entitled to a fixed percentage dividend before any dividend is paid to

ordinary share holder. However, preference dividend can only be paid if sufficient

distributable profits are available, although, with cumulative preference shares the right to an

unpaid dividend is carried forward to later years. The arrears of dividend on cumulative

preference shares must be paid before any dividend is paid to ordinary shareholder. For

credibility sake, companies always try to pay the fixed dividend regularly. Like debt

instrument, preference shares too are redeemable or irredeemable.

Ordinary shares

Ordinary shares are issues to owners of a company. They have a nominal or face

value. The memorandum and article of association of a company specifies the number of

authorized ordinary shares a company can issue. The ordinary share holder of a company

have residual claims in the company, their claims to income and assets comes after the

creditors (debt holders) and preference share holders have been paid in full. As a result, a

share holder’s return on investment is less certain than the return to a lender or a preference

share holder. However, there is no limit to the returns of ordinary share holders when

compared to others. Apart from the three capital market instruments discussed, another

category of capital market instrument is convertible securities. There are a hybrid security

that shares both the features of a fixed income security and the ordinary shares. There are

securities (debenture or preference shares) that are convertible into ordinary shares of the

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company at the option of the holder in the future. New issue of these securities can take the

same form as for preference shares and debentures.

Stock Market Operators

The principal active operators in the Nigeria stock market include the stock exchange,

stock brokers, investment advisers, issuing houses and the registrars.

4.2.9 The International Foreign Exchange Market and the Nigerian Capital Market

The CBN contended that the global financial crisis led to the depreciation of the

currencies of most developing economies against the US dollar. The collapse in commodity

prices also played a role in the depreciation of the exchange rate in some developing and

emerging countries, such as Australia and Canada. Furthermore, in the aftermath of the

crisis; only a few currencies appreciated or remained stable against the US dollar. The

currencies included those of some oil exporting countries negatively affected home

remittances and tourism, which were important sources of foreign exchange for many

countries in sub-Saharan Africa. Responding to the high capital outflows, the currencies of

countries in sub-Saharan Africa depreciated sharply against the US dollar, recoding an

average depreciation rate of about 25.0 percent. Other countries in the world also experienced

varying levels of depreciation in their currencies against the US dollar.

The naira weakened against major international currencies over the years. On the

average, it depreciated against the US dollar by 20.1 percent, the British pound sterling by 5.6

percent, the euro by 15.8 percent, the Swiss franc by 16.4 percent, the Japanese yen by 27.5

percent, the CFA by 15.7 percent, the Saudi Riyal by 20.1 percent and the WAUA by 18.1 percent

(www.centralbanknigeria.com).

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4.2.10 Central Bank Interest Rate Policies and Administrative Challenges Confronting

the Nigerian Capital Market in mobilizing long-term funds for National

Development

The CBN argued that the central banks across the global continued with expansionary

monetary policies for most of 2009. In particular, many central banks maintained low interest

rates throughout the year, as they reduced their policy rates to considerably low levels. The

policy rate was around 0.25 percent in Canada, Sweden, and the United States, and 1.0

percent in the Euro area. In the US, the Federal Reserve, the Bank of Canada and the Sieriges

Risk bank, efforts were made to transmit the cuts in short-term interest rate to longer

maturities by explicit commitment to the maintenance of a policy of low interest rates until

there were clear signs of recovery. In overall, the cuts in interest rate were generally smaller

in emerging economies, reflecting a combination of higher inflation and stress in the external

sector arising from large capital outflows that could lead to a depreciation of the economic

currency exchange rate.

Following signs of recovery, a number of central banks turn exit strategies from the

intervention measures that had characterized the massive cuts in the interest rates in 2008 and

part of 2009. For most of the central banks, raising policy interest rates did not necessarily

require the unwinding of unconventional policies, as some unconventional policies, including

systematic liquidity easing measures, unwind naturally with improvements in the financial

market conditions. Other measures were aimed at alleviating the impaired credit markets

which were likely to remain until conditions in those markets normalized. In general, for

central banks in emerging and developing economies, maintaining their independence

remained a key prerequisite for price stability in the long run.

The CBN revealed that the global stock markets had a turbulent time in 2007, owing

especially to declining consumer spending and weak corporate performance. In addition, U.S.

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subprime mortgage lending crisis sparked off credit squeeze and increased cost of borrowing

in many developed economies.

Furthermore, in keeping with the trend in the global securities market, the Nigerian

Stock Exchange has commenced the processes of Demutualization, with the setting up of a

committee of Council to design a blueprint for its implementation. The needs for

Demutualization are to enhanced financing opportunities to the Exchange and its expected

improved efficiency in the management of the Exchange as a business

(www.centralbanknigeris.com).

4.2.11 Foreign Portfolio Investment on Administrative Challenges confronting the

Nigerian Capital Market in mobilizing long-term funds for national Development in the

country

The CBN argued that despite price declines and the shunning of risky investments,

foreign investors continued to demonstrate confidence in the Nigerian stock market during

the year. Following modest recoveries in their home markets, some of the erstwhile foreign

investors returned while new investors sought opportunities, considering the key attributes of

high returns, liquidity and safety of investments. Despite the global recession, the market

remained attractive to foreign investors and portfolio managers seeking cheap equities and

high-yielding bonds. Interim statistics show purchases (inflow) by foreign investors during

2009 to be in excess of N228.986 billion, representing 33.4% of the aggregate turnover – an

increase, when compared with the N153.457 billion recorded in 2008. Concurrently, total

sales (outflow) during the year were in excess of N195.583 billion, culminating in a net

inflow of N33.403 billion, a reversal of the net outflow of N480.5 billion in 2008

(www.centralbanknigeria.com).

On the Global Outlook, the DG of SEC posited that global economic projections are

that there would be further growth for Sub-Saharan Africa in 2006. For oil producers like

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Nigeria he said, growth would be driven by elevated crude oil prices. However he argued, the

first quarter of the year 2009 would be critical for the banking sector and the economy, as the

merging banks confront the challenges of integration. To him, the regulatory challenges are

enormous and daunting. According to him, the Exchange expects significant changes in the

number and size of listed banks, but we are encouraged he said, by the quality of the banks

that would remain on our Official List at the end of the day.

According to the DG, the Primary (New Issues) Market promises to be busy this year,

as insurance companies move to recapitalize in keeping with the Federal Government’s

directive in 2005 on minimum capital requirement for industry operators. He revealed that as

with the banks, the Stock Exchange will work with other regulatory agencies in the financial

district to ensure the attainment of the desired objectives. The Exchange commends recent

government economic initiatives, which have further propelled the stock market towards

sustainable development and growth. However, the business environment requires urgent

improvement in the Year 2009, as the cost of doing business remains high and would not be

helped by the proposed increase in Value-Added Tax (VAT).

It is good that government proposes to commit more resources to the provision of

electricity supply, roads and security, and hopefully that the Bureau of Public Enterprises

(BPE) would consummate its decision to list the shares of NITEL and Power Holding

Company of Nigeria (PHCN) on our market soon. The market has enough capacity to absorb

these and other issues (www.centralbanknigeria.com).

4.2.12 Effect of Global Recession on the Nigerian capital market

The International Monetary Fund (IMF) projects a lower global GDP growth rate of

4.75% in 2008, compared with 5.2% in 2007, owing to recent financial turmoil and trade

imbalances. Also, sub-Saharan Africa is expected to grow from 6.1% in 2007 to 6.8% in

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2008. However, IMF was more bullish on the growth prospect of the Nigerian economy,

projecting a growth rate of 8%, though lower than the 11% targeted by the Federal

Government. Nigeria’s growth was predicated on the coming on stream of new production

facilities in the oil and gas sector.

There is no gainsaying that the envisaged growth would only be achievable if the

current macroeconomic stability is sustained and supportive economic infrastructure are

provided at optimal levels. Over time, they have brought to the fore challenge militating

against stock market development in Nigeria. These challenges include the incidence of

multiple tax regimes on businesses and investors. Therefore, the National Assembly is urged

to expedite action on all Bills on Tax and Capital Market Reforms currently before it.

The pace of implementation of the privatization programme generally is rather slow.

There is hope that the Bureau of Public Enterprises (BPE) would expedite action so that those

companies earmarked for privatization through the stock market can be concluded without

much delay.

The Federal Government is commended for sustaining the issuance of bonds through

the Debt Management Office (DMO). These bonds, because they are in most cases long-

dated have provided a reasonable depth to the market. The announcement by DMO of the

intention of the Federal Government to sell bonds worth 600 billion in 2008 to fund

infrastructure projects is a welcome development. However, for the purpose of transparency

and pricing efficiency, the DMO should migrate trading on the OTC to the Exchange, which

has the technology to deliver on transparency and efficiency.

There is therefore, a confidence that current growth trend in the market would be

sustained. Also, some companies will recapitalize using the instruments available in the

market. The immediate challenge would be in the cost of transactions in the market, which

rose in 2007 as the Federal Inland Revenue Services commenced charging Value-Added Tax

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on stockbrokers’ commission and Stock Exchange/Central Securities Clearing System

Limited transaction fees.

It is also on good note that through the exchange supportive role, some comatose

listed companies have been resuscitated. In the course of 2008, some companies were

promoted from our Emerging Market to the First-Tier, while admitting new companies to the

Official List, including listings in the newly introduced Third-tier Securities Market.

Also, the Exchange has continuously work to support government and its agencies

towards the realization of Nigeria’s economic development and growth objectives, working

closely with the SEC and other members of the Financial Sector Regulation Coordinating

Committee (FSRCC), while maintaining relationship with operators in the international arena

with a view to facilitating the flow of international investment capital to Nigeria.

Hypotheses two which says that enormous challenges that confronted the Nigerian

capital market hindered its efficiency in mobilizing long-term funds for economic

development in Nigeria from 1980 to 2009 is justified due to the factors that are responsible

for lack of interest on the part of the companies, which include, among others: lack of

liquidity, corporate bond and debenture, bond market liquidity, the price of capital, the bond

trading and repos or purchase agreement.

The analyses also reveal that the impact of global financial crisis such as global

recession, output and growth, global inflation, global commodity demand and prices, world

trade, international financial markets, money markets, capital markets, the international

foreign exchange market, central bank interest rate policies, significantly hindered its

efficiency in mobilizing long-term funds for economic development in Nigeria this global

crisis affected it because of Nigeria’s dependence on external finance. For instance the global

inflation leads to weak global demand. The global commodities and prices especially affect

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the Nigerian crude oil. Declines in aggregate global trade affect the balance of payment. All

these and more have a direct or indirect effect on the Nigerian capital market.

4.3 MEASURES TO ENHANCE THE CAPACITY OF THE ADMINISTRATIVE

EFFICIENCY OF NIGERIAN CAPITAL MARKET IN MOBILIZING FUNDS FOR

NATIONAL DEVELOPMENT IN NIGERIA

Measures like privatization, deregulation of the financial sector, monetary reforms,

and upgrade of market technology could be employed to enhance the capacity of the Nigerian

capital market in mobilizing funds for economic development in Nigeria.

4.3.1 Privatization of the Public Enterprises

The history of public corporations in Nigeria dates back to the colonial era. The

colonial government established some public enterprises to provide essential services like

railways, roads bridges, electricity, ports and harbors waterworks, and telecommunication.

Social services like education and health were still substantially left in the related hands of

the Christian Mission. But even at this initial stage government moved positively into some

of the direct productive sectors of the economy. However the post independent era marked a

watershed in the growth and spread of public corporations.

Ake (1981) has offered four reasons for the growth of public enterprises in the

immediate post colonial period. The first reason has to do with the desire of the national petit-

bourgeoisie which inherited political power from the colonial masters to create an economic

base for its political power. Being essentially capitalists without capital, the petit- bourgeoisie

used the instrumentality of the state to empower themselves economically public corporation

served as a conduit through which public funds were channeled to private pockets. The

second reason has to do with the struggle by Nigerians for the control of the economy as well

as the struggle for economic independence. Nigerian politicians felt that they had to build up

enterprises that can compete with the foreign ones. Thirdly, some public enterprises were

established as a means of promoting experts and to realize import substitution. Finally, some

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of the state enterprises came into being as a result of nationalizations of foreign-owned

private enterprises.

Rationale for Privatization of public enterprises in Nigeria Mismanagement, under-

utilization and huge wastage of material resources and manpower potentials gave rise to the

need for privatization and commercialization program. There are about 600 public enterprises

in Nigeria run by or controlled by the Federal Government. Many more are controlled by

state Governments these companies takes a sizable portion of the federal Budget and account

for over 5,000 appointments into their management and Board- a powerful source of political

patronage. Transfers to these enterprises run into billions of Naira. These transfers were in

form of subsidized foreign exchange, import duty, waivers, tax exemptions and / or write off

of arrears, unrequited revenues, loans and guarantees and grants/ subventions. These

companies were also infested with many problems which became an avoidable drag on the

economy such as:-

1. Abuse of monopoly power

2. Detective capital structure

3. Heavy dependency on treasury funding

4. Rigid bureaucratic structures and bottleneck

5 Mismanagement

6 Corruption and Nepotism

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With all these problems following the economic recession of 1980’s the government

had no other option but to take a positive step. Apparently, the economy can no longer sustain

the level of wastages associated with public enterprises. Also as a step to get out of this

malaise, a solution has to be found on how to reduce wastes. Privatization becomes the only

solutions.

Privatization Program in Nigeria

Privatization in Nigeria was formally introduced by the privatization and

commercialization Decree of 1988 as part of the structural Adjustment program (ASP) of the

Ibraham Badamosi Babangida administration (1985-93). As McGrew argued, SAP is a neo-

liberal development strategy devised by international financial institutions to incorporate

national economics into the global market.

The vision of a “global market civilization” has been reinforced by the policies of the

major institutions of global economic government namely up to the mid 1990s. Underlying

their structural adjustment programs has been a new- liberal development strategy- referred to

as the washing on consensus which prioritizes the opening up of national economics to global

market forces and the requirement for limited government intervention in the management of

the economy. One of the main objectives of SAP was therefore to pursue deregulation and

privatization leading to removal of subsidies, reduction in wage bills and the retrenchment of

the public sector ostensible to trim the state down to size.

The overall objectives of the privatization exercise were to:

1. Improve on the operational efficiency and reliability of our public enterprises;

2. Minimize their dependence on the national treasury for the funding of their

operations;

3. Roll back the frontiers of state capitalist and emphasize private sector initiative as the

engine of growth;

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4. Encourage share ownership by Nigerian citizens in productive investments hitherto

owned wholly or partially by the Nigerian Government and, in the process, to broaden

and deepen the Nigerian market.

In both developed and developing countries, privatization has grown in popularity and

acceptability. It has also become an important instrument that government can use to promote

economic development, improve the production and distribution of goods and services,

stream line Government structure, and reinvigorate industries controlled or managed by the

state (Rondinelli and Iacono 1996).

Privatization has become an acceptable paradigm in political economy of states. It is a

strategy for reducing the size of government and transferring assets and service functions

from public to private ownership and control. Privatization is based on four Core beliefs

(Ugorji, 1995):

1. Government is into more things than it should be. It is intruding into private enterprise

and lives;

2. Government is unable to provide services effectively or efficiently;

3. Public officials and public agencies are not adequately responsive to the public; and

4. Government consumes too many resources and thereby threatens economic growth.

On the theoretical plane, four distinctive schools of thought have tried to explain

variations of policies applicable to privatization. First, there is the free-market ideology of the

liassez-faire classical economic theory, which favors the unleashing of the competitive profit

motive by emancipating free- market pricing from the interfering hands of state regulation

(Samuelson; 1980). It argues that the character of the traders and that of the sovereign are

inconsistent, that public administration was negligent and wasteful because public employees

have no direct interest in the outcome of their actions. Privatization according to this theory

would reap the advantages of the market system and competition, namely effectiveness,

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productivity, and efficient service. This trend will also strengthen market forces with some

degree of deregulation, economic liberalization, relaxation of wage and price controls

(Ugorji, 1995).

Enterprises have deteriorated in Nigeria. For example, National Electric Power

Authority (NEPA) now Power Holding Company of Nigeria (PHCN), Nigerian

Telecommunications limited (NITEL) and Nigerian Railways Corporation (NRC) Nigerian

Postal Services (NIPOST) however, is the only exemption. Letters now get to anywhere in

Nigeria within 3 days as against 14 days before it was commercialized. Furthermore, Bala

(2004) found out that the privatization in Nigeria has been able to replace the public

monopoly with private monopoly. However, the major impact of the reform has been in the

area of increased competition and efficiency. These were evident in the telecommunication,

petroleum and banking sectors. The public sector reforms accounted for majority of the

foreign direct investment (FDI) that came to the country between 1999 and 2005.

The clamoring for privatization in Nigeria dates back to 1965. Rweyemanu and

Hyden (1975) justified the poor performance of public enterprises in Nigeria and stated that

between 1960 and 1965 the Nigerian Railway Corporation alone had 13 enquiries into its

activities and in 1965 it had a deficit of N7 million and the World Bank described its finances

as disastrous. At the International scene, the World Bank in 1981 declared for the dismantling

of the African Public Enterprises system and submitted that; “African governments should

not only examine ways in which public sector can be operated more efficiently but should

also examine the possibility of placing greater reliance on the public sector... what is needed

is straight forward acceptance of the principle that under certain circumstances, liquidation of

public enterprises may be desirable”.

The unprecedented economic problems in Nigeria since early 1980s which led to the

accumulation of debts and advise from the international quarters to borrow and accept I.M.F.

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conditionality and the subsequent refusal of the loan by Nigeria led to the Structural

Adjustment Program (SAP). It was aimed at restructuring the economy and making it more

competitive and efficient.

In Nigeria, however, privatization has become a major policy instrument, which in

addition with other instruments was expected to contribute to the overall attainment of the

general macroeconomic goals and could be employed to enhance the capacity of the Nigerian

capital market in mobilizing funds for economic development in the country.. Therefore,

privatization in Nigeria was aimed at achieving the following objectives:

1. To restructure and rationalize the public sector in order to lessen the dominance of

unproductive investments in that sector;

4 To re-orientated the enterprise for privatization and commercialization towards a new

horizon of performance improvement, viability and overall efficiency;

5 To ensure positive returns in public sector investment in commercialized enterprises;

6 To check the present absolute reliance of commercially oriented organization on the

Treasury for funding and to encourage their approach to the Nigerian capital market;

4.3.2 Deregulation of Financial Sector

Financial reforms and attendant policy prescriptions are aged long phenomena. They

represent the various transformations and policies adjustments and overhaul that are directed

at the art, practice and activities of financial institutions and market overtime in response to

nominal need for operational improvement and growth of both the institutions and economy

as a whole. They could be internal or external in nature, reflecting critical comprehensive

amendment, restructuring and/or additions to the existing body of laws, guidelines and

policies (Chinedu and Muoghalu, 2004). In Nigeria, the ability of the financial sub-sector to

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play its role has been periodically punctured by its vulnerability to systematic distress and

macro-economic volatility and policy fine tuning inevitability (Kama, 2006).

Financial sector deregulation is a policy, which allows market forces to determine the

allocation of credit, rather than government fiat. It includes the liberalization of credit

controls, foreign exchange control, licensing of banks and interest rates and other institutional

reforms (Ojo, 1991). The efficacy of money and capital markets is enhanced under financial

sector deregulation within which competition is allowed and within which market forces are

unfettered. It is argued that financial deregulation improves the efficiency of resource

allocation (Stiglitz, 1998). This is because it increases savings. The improved efficiency, with

which resources are allocated among alternative investment projects, raises the rate of

economic growth. Thus, it offers the opportunity for many diversified financial instruments to

be at play. It also ensures that capital is mobilized from several avenues other than the

traditional banking sectors. The policy raises investor confidence and serves as an incentive

for the flow of capital and investment. Thus, financial sector deregulation has been perceived

to foster development and increase growth in the long run (Levine, 1997). It has also been

seen, in developing countries, to stimulate domestic savings and growth and reduce excessive

dependence on foreign capital flow (Demirguc-Kunt & Detragiache, 1998).

It seems these benefits of deregulation could not be appropriated by the Nigerian

economy before 1986. This is because monetary policy before that period was regulated by

government through different Decrees and Acts. The regulation of the financial sector is

derived from the fact that the system is primarily involved in managing customers’ resources,

and there is therefore need to check fraud and malpractices, as well as to ensure that the

financial system operates in consonance with the desired economic system (Ojo, 2001). Thus,

the regulation of the financial system is expected to support the achievement of efficiency,

stability and equity in the system and the economy generally.

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The design and implementation of monetary policy between 1970 and 1985 (under

regulation) had the primary objectives of maintaining relative price stability, a healthy

balance of payments position and stimulation of output and employment. Throughout this

period, monetary policy depended on the use of direct monetary instruments, such as the

prescription of aggregate credit ceilings, use of selective credit controls, and imposition of

special deposits. However, monetary policy was impotent during the period of economic

control due to the ineffectiveness of the monetary policy instruments, coupled with the

inappropriate control of some monetary indicators and lack of harmony between fiscal and

monetary policies (Ojo, 2001).

For instance, under the regime of control, interest rates were administratively fixed at

relatively low levels in the hope that these would enhance investment and output. Such an

action only enhanced the demand for credit while stifling the supply of savings especially

when inflationary pressures were high. Moreover, credit ceilings as a monetary policy

instrument were ineffective. Control helped to sustain inefficiency in the banking industry. It

protected the weaker banks while preventing the growth of the more efficient ones. It also

promoted the growth of credit and general operations of the unregulated markets.

Moreover, the lack of harmony between fiscal and monetary policies hindered the

effectiveness of monetary policy between 1970 and 1985. There is a direct link between

monetary policy and the fiscal operations of the government. When deficit fiscal policy is

taken, there is a possibility that part of that deficit will be financed by the government

through borrowing from the banking system. The portion to be financed from the domestic

banking system is part of the aggregate bank credit to the economy. There are serious

implications when that portion is exceeded and/or is partly or wholly accounted for by the

Central Bank. In this connection, the magnitude and pattern of government fiscal operations

have been a major source of ineffective monetary control in Nigeria (Ojo, 2001).

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The adverse economic trends during the period 1970-1985 prompted the adoption of

the Structural Adjustment Program, which was introduced formally in July 1986. Its

underlying philosophy was to ultimately institute a more efficient market system for the

allocation of resources, with the implication that the excessive control of the previous two

decades would be gradually eliminated or reduced to a level that would not inhibit growth

and development. Generally, the ultimate objectives of monetary policy include: promotion

of price stability, maintenance of external equilibrium and stimulation of output and

employment. In the specific environment of financial and economic liberalization, monetary

policy was also to stabilize the economy in the short-run and to induce the emergence of a

market-oriental financial sector for effective mobilization of financial savings and efficient

allocation of resources.

To achieve these objectives of monetary policy and to guide the operations of specific

institutions, different Decrees and Acts were promulgated. These Decrees and Acts include

the following: The Central Bank of Nigeria (CBN) Decree 24 of June 24, 1991. The Decree

was to strengthen the supervisory activities of CBN in addition to giving it powers in the

areas of bank examination, monetary management and enforcement of prudential standards in

the bank and non-bank financial institutions. The Banks and Other Financial Institutions

Decree (BOFID) 25 of June 24 1991 were promulgated to centralize the function of licensing

as well as regulating banks and other financial institutions. This Decree was amended in

1997, 1998 and 1999. The Nigerian Deposit Insurance Corporation (NDIC) Decree 22 of

June 15, 1988 set up the NDIC and outlined the procedure for providing deposit insurance

and related services to banks in order to promote confidence in the banking industry. The

Securities and Exchange Commission (SEC) Act of 1979 set up SEC as the apex regulatory

organ of the capital market. The Act enjoins SEC to promote an orderly and active capital

market. The Companies and Allied Matters Decree of 1990 further empowered SEC to

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approve and regulate mergers and acquisitions and authorize the establishment of unit trusts.

The Insurance Special Supervision Fund (Amendment) Decree 62 of 1992 set up the Nigerian

Insurance Supervisory Board, which was charged with the effective administration,

supervision, regulation and control of the insurance business in Nigeria. Also, the Federal

Mortgage Bank of Nigeria (FMBN) Decree 7 of 1977 set up FMBN partly to license and

regulates mortgage institutions. Other development that took place include the establishment

of the Money Laundering Decree 3 of 1995, which was designed to prevent drug money and

other illegally acquired assets from entering into the financial system in order to forestall the

damaging effects of such monetary injection. The Failed (Recovery of Debt) and Financial

Malpractices in Banks Decree 18 of 1994 was promulgated to facilitate the prosecution of

those who contributed to the failure of banks and to recover the debts owed the failed banks.

To further strengthen banking institutions, the paid-up capital of commercial and

merchant banks was raised from fifty and forty million naira respectively to a uniform capital

base of five hundred million in 1998 and one billion in 2001. By the year 2005, all

commercial banks are expected to raise their capital base to twenty-five billion naira. This

policy is expected to curb banking distress arising from inadequate capital base. Furthermore,

the autonomy of the CBN was fully restored by the CBN (Amendment) Decree of 1998. With

this, the CBN was empowered to carry out its traditional and developmental responsibilities

without fear or favor. It needs to be pointed out here, also, that the discount window facilities

were expanded in September 1998 with the admittance of three new market instruments to be

traded at the Open Market Operations (OMO). These include: the Nigerian Deposit Insurance

Corporation (NDIC), Bankers’ Acceptance (BA) and the Negotiable Certificates of Deposits,

in addition to the existing Nigerian Treasury Bills and Nigerian Treasury Certificates.

All these developments took place to achieve some identified macroeconomic

objectives. For instance, at the commencement of the program, the traditional instruments

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were fine-tuned to deal with the excess liquidity in the economy. This was done particularly

to dampen inflationary pressure and restrict the demand for the limited supply of foreign

exchange. Several measures were added to fight the growth of excess liquidity. These include

rationalization of sector credit control so as to give a larger measure of discretion to banks in

respect of their credit operation; deregulation of interest rates to improve efficiency in

savings mobilization and resource allocation; use of stabilization security to put in check the

incidence of excess liquidity; enhancing the minimum paid-up capital of commercial and

merchant banks; and the use of Open Market Operation (OMO) in the secondary market in

buying and selling of government securities (Ojo, 2001).

Although monetary policy during deregulation has apparently improved economic

performance in a handful of countries such as Ghana, Botswana and Mauritius (see Fry,

1978; Khatkhate, 1988; King and Levine, 1993; Ndekwu, 1995), it has led to financial

distress and economic retardation in the others, including Nigeria (Corbo and De Melo, 1987;

World Bank, 1989; Sundararajan and Balino, 1991; Athukorala and Rajapatirana, 1993 and

Anyanwu, 1995).

Financial Sector Development and National Development

It is generally accepted that financial markets and financial institutions are important

factors for promoting national development. Financial development can facilitate the transfer

of resources from less productive users to those with greater potentials. It also enables the

mobilization of resources and reduces fragmented capital markets and traditional self-

financed investments (Bencivenga & Smith, 1999; Berthelemy & Varoudakis, 1996.

Gurley and Shaw (1955), Goldsmith (1969), and McKinnon (1973), view financial

markets as central in economic activity. According to these scholars, differences in the

quantity and quality of services provided by financial institutions partially explain why

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countries grow at different rates. The role of the financial market in promoting economic

development can be hampered if market forces are fettered {McKinnon, 1973; Shaw, 1973).

It is a known fact that financial regulation by government of developing countries has been in

the form of ceiling on deposits, high reserve requirement on deposits, and compulsory credit

allocations. This has led to high inflation rate, which reduces the attractiveness of holding

claims on the domestic financial system (Fry, 1978; McKinnon, 1988; Ikhide, 1990;

Athukorala & Rajapatirana, 1993). They believe that the economies of developing countries

could perform better by removing government controls on interest rates and other financial

variables.

Some other scholars have also observed different causal relationship between

economic growth and financial intermediation (e.g. Patrick, 1966; Ho`nohan, 1966; Jung,

1986; Odedokun, 1989; Kirakul, Jantarangs & Chatanahom, 1992; Levine, 1997; and

Rousseau, 1998). Specifically, Jung (1986) finds evidence for the causal relationship between

financial development and economic growth. According to him, the less developed countries

are characterized by the causal direction running from financial to economic development,

while the developed countries are characterized by the reverse causal directions. Two

possible causal relationships between financial development and national development are

identified (Patrick, 1966; Murinde and Eng, 1994). The first called ‘demand following’ –

views the demand for financial services as dependent upon the growth of real output and

upon the commercialization and modernization of agriculture and other subsistence sectors.

Thus, the creation of modern financial institutions, their financial assets and liabilities and

related financial services, are a response to the demand for these services by investors and

savers in the real economy (Patrick, 1966:174). The second causal relationship between

financial development and economic growth is termed ‘supply leading’ (Patrick, 1966). This

implies that the creation of financial institutions and their services occurs in advance of

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demand for them. Thus, the availability of financial services stimulates the demand for these

services by the entrepreneurs in the modern, growth-inducing sectors. The causal links

between financial development and national development have been treated extensively in

the new growth theory

4.3.3 Monetary Reforms and Administrative challenges of the Nigerian Capital Market

Many countries faced with repressed financial systems usually experience problems

of monetary control associated with the ineffectiveness of direct credit and interest rate

controls. These controls are associated with inefficiency in resource allocation. Under such a

regime, monetary aggregates cease to bear a close relationship to the goals of monetary

policy. Monetary reforms are central to most financial reforms. The focus is on moving to

more indirect means of monetary control and therefore freeing controls on both credit and

interest rates. Indirect instruments that can be used in the early stages of reform while

markets are not yet fully developed include market operations such as auctions of

government treasury bills or central bank refinance credits or certificates of deposits to

control money market liquidity (Simatele, 2003). More indirect market based approaches

enhance monetary control and increase the likelihood of achieving macroeconomic stability.

Increasing reliance on indirect monetary controls allows the authorities to eliminate

distortions in the financial markets resulting not only from controls of interest rates and

credit, but also from the use of high non-interest bearing reserve requirements to control

liquidity. Indirect monetary control also enhances the development of money and inter-bank

markets, which eventually also improve the potency of monetary policy. It is desirable

therefore to introduce the use of such instruments early in the reform process.

The elimination of interest rate and credit controls has potentially important effects on

monetary aggregates. The liberalization of interest rates and credit could lead to a shift in

money demand affecting both the quantity demanded and the interest rate elasticity of their

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demand. On the one hand, since credit was constrained by direct controls before the reforms,

there is a tendency for banks to deplete their excess reserves by increasing lending in an

environment already wrought with excess demand for credit (Johnston and Brekk, 1999).

On the other hand, liberalization of interest rates may lead to initial increases in

deposit rates relative to other rates. This would lead to increases in deposits and broad money

holdings. In that case, broad money will become less sensitive to changes in the general level

of interest rates. Because of these structural shifts, the information content of aggregates

would become difficult to assess during the transition stage. It also becomes difficult to

control the aggregates using interest rates, so a wider range of financial indicators is required

during this phase (Simatele, 2003).

Comparatively, the increases in credit are likely to be higher than increases in deposits

since deposits are not directly constrained before reforms but are rather just responding to

changes in the deposit rate. Following this adjustment period, credit growth slows down

while deposits continue to grow if positive real interest rates are maintained. Credit and

deposits eventually converge allowing for balanced growth with a higher level of overall

resource mobilization. If positive interest rates are not maintained, credit expansion could

result in a loss of macroeconomic control and increasing inflation or worsening the balance of

payments. Obviously, an attempt to control credit expansion by the use of interest rates or

indirect monetary controls could result in large increases in interest rates. Where the capital

account is open, this could lead to massive capital inflows and a subsequent appreciation of

the exchange rate, which in turn could have adverse effect on the real sector (Simatele, 2003).

It must also be stated that there is a close link between the designs of monetary policy

instruments and operations and the structure and depth of money markets, including the

supporting payments systems. As a result, reforms of monetary control procedures are best

accompanied by parallel measures to strengthen money and inter-bank markets and payments

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systems. The opening up of the capital account also has implications for monetary policy.

Because direct methods of monetary control become very ineffective once the capital account

is opened, the move to indirect monetary control becomes an inevitable pre-requisite. With

increased capital mobility, the demand for domestically defined monetary aggregates may

become more sensitive to international interest rate differentials making it more difficult to

identify a stable domestic monetary aggregate. Opening up the capital account therefore

reinforces the adoption of a more eclectic monetary framework and a move towards giving

more weight to exchange rates in monetary assessments.

Bank regulation is another important aspect of monetary reforms. Before most of the

physical aspects of financial reforms such as those discussed above are put in place, there is a

need to put a basic financial structure such as auditing, accounting, legal systems, and basic

regulation in place (Caprio, 1997). The main goal of prudential regulation is to lower the

risks and costs associated with institutional failure while achieving the increased efficiency of

the financial system. This implies that while the government should leave the economy to the

market, it should enhance its role to ensure fair and honest markets through prudential

regulations without using it to perpetuate the controls existing before the reforms. When

reforms are implemented without first putting appropriate regulation in place in an economy

where the banking system is under-capitalized or insolvent, bank distress can result as has

been seen in many developed and developing countries (Diaz-Alejandro, 1985; Corbo and De

Melo, 1987; World Bank, 1989; Athukorala and Rajapatirana, 1993; Anyanwu, 1995;

Kamisky and Reinhart, 1995; Fischer and Chenard, 1997; Honohan, 1997; Adebiyi, 2002;

and Simatele, 2003). The resulting distress can in turn complicate monetary management and

limit the effectiveness of monetary and stabilization policies.

The presence of information asymmetries magnifies the need for appropriate

regulation early in the reforms. When information asymmetries are prevalent in most

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developing countries, problems of adverse selection lead to the setting of imprudently high

interest rates. Banks end up attracting very risky borrowers resulting in high levels of non-

performing loans. Putting appropriate regulation in place allows the markets to provide

correct signals while helping to ensure that this takes place at acceptable costs and in an

orderly manner. When liberalization precedes prudential regulation, weaknesses in the market

can lead to financial fragility, bank failures and an undermining of monetary policy

(Simatele, 2003; Demirguc-Kent and Detragiache; 1998; and Ebhodaghe 1999; Adebiyi,

2002).

4.3.4 Upgrade of Market Technology

The Trading Floor in Lagos was re-opened in 2007, following a comprehensive

overhaul of the floor that included the installation of workstations, a central UPS and

stabilizer, and a redesigning of the floor to accommodate more dealing members. President

Umaru Musa Yar’Adua commissioned the new world-class Trading Floor on Friday,

November 9, 2007. The Exchange has in the wake of this development commenced an

upgrade of the Horizon, the trading software. The upgrade to the latest version of Horizon

which comes with improved functionalities that would impact positively on trading on the

Exchange, especially with regard to derivatives and bond trading is highly recommended.

Other improvements with state-of-the-art operating infrastructure will enhance the market

and facilitate the requisite network expansion and other innovations.

Expanded Branch Network

The Uyo Branch of the Exchange was commission on May 26, 2007 and inaugurated

the Automated Trading Floor on Monday, November 19, 2007. This should give more

Nigerians access to the market and expand the businesses opportunity for stockbrokers. The

Exchange’s planned opening of two branches in Ilorin, Kwara State and Bauchi, Bauchi State

is highly encouraged.

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Extension of Trading Hours

The Exchange increased trading hours from two hours to three hours response to

increased trading activity should be enhanced. This will impact positively on trading volume

and enhanced the pricing efficiency of the market.

Investor Protection Fund

The SEC approved guidelines for the administration of the Investor Protection Fund

(IPC) should be enforced. Subsequently, the exchange has incorporated the fund at the

Corporate Affairs Commission (CAC) in order to enable its independent operation. The

Board of Trustees was appointed and arrangement made to boost the fund through additional

contribution by members of the Exchange and other stakeholders.

Investor Education

In view of the importance of investor education to the operations of the stock market,

the exchange in 2004 sustained its investor education initiative, with the organization of

international investment road shows and National Essay Competition for secondary schools

and tertiary institutions. The road shows took the exchange and some of its dealing members

to Washington DC, Atlanta, New York, London and Nairobi.

Also, the exchange and major market operators participated in the Financial

Conference organized by Corporate Council on Africa in New York, United States of

America. The exchange in collaboration with Cross River State Government organized a two-

day stake holder’s forum on the TINAPA Project in Lagos, with a view to promoting local

awareness for the workings of the derivatives market. In furtherance of these objectives, the

exchange organized workshops on Derivatives Market and Asset Securitisation in March and

May, respectively. Dealing members of the exchange and other interest groups participated

actively in the three programmes.

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The exchange organized the biennial conference of directors and Chief Executive

Officers of Quoted Companies and other stakeholders in the financial market in Abuja. The

conference was instituted to strengthen the relationship with the issuers of securities, market

operators and other stakeholders as part of the overall effort to enhance development of the

stock market.

The on-going consolidation programme in the financial sector has placed enormous

responsibility on the stock market and these education programmes should continue. This is a

welcome development with the level of investors’ awareness; the market will continue to

achieve high level of investor patronage of issues.

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CHAPTER FIVE

SUMMARY OF FINDING AND DISCUSSION

5.1 SUMMARY OF FINDINGS

The findings from this study raise some policy issues and recommendations, which

will reinforce the link between the stock market and economic growth in Nigeria. Given that

the stock market operate in a macroeconomic environment it is therefore necessary that the

environment must be an enabling one in order to realize its full potentials.

The demand for the services of the stock is a derived demand. With the existence of a

positive relationship between stock market development and economic growth, it is pertinent

to recommend that there should be sustained effort to stimulate productivity in both the

public and private sectors.

The determination of stock prices should be deregulated. Market forces should be

allowed to operate without any hindrance. Interference in security pricing is inimical to the

growth of the market.

The stock market is known as a relatively cheap source of funds when compared to

the money market and other sources. The cost of raising funds in the Nigerian market is

however, regarded to be very high. There should be a review downward of the cost, so as to

enhance its competitiveness and improve the attractiveness as a major source of raising funds.

Considering the benefits being enjoyed by the stock market through the

internationalization of its operations, there should be no policies turn around but a sincere

pursuit of this policy.

Though the recent legislations on the stock market have been hailed in many quarters

as one of the best thing to happen to the stock market in recent times, there are still some gray

areas. For instance, the removal of the double taxation effects on the return of the investors in

the stock market must be effected if the market is to develop as envisaged.

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Given the present political dispensation, all the tiers of government should be

encouraged to fund their realistic developmental program through the stock market. This will

serve as a leeway to freeing the resources that may be used in other sphere of the economy.

That the stock market promotes economic growth is not in doubt. It serves as an

important mechanism for effective and efficient mobilization and allocation of savings, a

crucial function, for an economy desirous of growth.

This study attempted to place this role in the Nigerian context between the period of

1980 and 2009. By the use of some notable stock market development indicators, the

relationship between stock market development and economic growth was found to be

positive. This suggests that for a significant growth the focus of policy should be on measures

to promote growth in the stock market.

The Nigerian stock market has a bright prospect given the recent policy direction

especially the abrogation of all laws that hitherto hamper its effective and efficient

functioning. Also, the internationalization, the improvement in the infrastructural facilities in

the market in line with what obtains in the developed market and also the present democratic

dispensation will all work individually and jointly to ginger the prospect of the stock market.

In response to the impact of the global economic crisis on the domestic economy, the

government introduced several policy measures to address the problems and prevent the crisis

from throwing the economy into recession. The policy measures adopted were mainly on

three broad fronts, namely monetary easing, fiscal easing and trade policy.

On the monetary front, the monetary authorities embarked on monetary easing to

ward off the contagion effect of liquidity and credit crunch in the domestic financial market.

The monetary policy rate was adjusted downwards from 9.75 percent in 2008 to 6.0 percent

in 2009, CRR from 2.0 to 1.0 percent and liquidity ratio was retained at 30.0 percent,

resulting in lowering the inter-bank rate and increasing the banking system credit to the

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private sector. The CBN also expanded the discount window facilities to provide liquidity for

banks to firm up their positions.

Other measures included the identification, monitoring and safeguarding of banking

system vulnerability, particularly rising credit risk and cross-border contagion. The use of

high frequency data was embraced to help in improving the assessment of bank liquidity and

solvency, and in conducting credit risk diagnostics, including stress testing. Resident and

stand-by teams of target examiners were deployed to banks in the first quarter of 2009 to

ensure timely regulatory action and, in general closely monitor the activities of banks. The

framework for the Contingency Plan for Systematic Distress in Banks was also reviewed and

surveillance activities were further strengthened to ensure the soundness of the financial

system. The CBN injected about N620 billion bail-out funds into some insolvent banks to

shore them up and prevent contagion and a systematic crisis that might have arisen from their

failure. The monetary authorities also demanded full provisioning for non-performing credit

to detect the state of banks and institute remedial action. In addition, they were given the

latitude to restructure margin facilities, up to the end of 2009.

Other monetary policy measures included the introduction of consolidated and risk-

based supervision and the adoption of a common accounting year-end for all banks, effective

from end December 2009, to improve data integrity and comparability. The Bank also

proposed the establishment of an Asset Management Company of Nigeria (AMCON) to take

over the non-performing assets of banks.

The easing of fiscal policy by government was also to cushion the effects of the

global crisis on the domestic economy. In this regard, the Federal Government, in

collaboration with the CBN, floated a N200.0 billion bond for the deposit money banks,

under the Commercial Agricultural Credit Scheme, to improve mechanized/commercial

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agriculture. Also, the lower tariffs regime under the 2009-2012 Nigeria Customs and Tariff

Book was continued to stimulate domestic industrial production and manufacturing activities.

Given the high degree of openness of the Nigerian economy, the global recession had

the potency to impact negatively on the country’s economic activities. With the stabilization

of the global financial markets and subsequent recovery in the advanced economies, the

battery of policy measures initiated by government would check economic slowdown and

eventual slippage into negative growth. These policies are also expected to provide a basis for

a rapid turnaround of the financial system to be a driver of long-term development, through

unfettered intermediation of resources to critical sectors of the economy. Thus, sustainable

efforts to strengthen financial stability, through proactive regulation and supervision of

financial institutions, should be given priority. Furthermore, the Federal Government should

embark upon legal and institutional reforms to engender accountability and transparency in

all facets of economic engagements to bolster economic growth and prosperity.

In 2004, Nigeria reached another milestone in the drive to transform the economy.

During the year, the Federal Government launched the National Economic Empowerment

and Development Strategy (NEEDS), a medium term economic reform agenda, with the

primary objectives of poverty reduction, wealth creation and employment generation. Also,

the programme accords high priority to the private sector as the engine of growth through

which an estimated seven million new jobs would be created. Significantly, the reform has

been endorsed by the World Bank and the International Monetary fund (IMF).

However, economic performance in 2004 was mixed, with significant gap between

expectation and achievement. Despite stellar performances in the telecommunications sector

and the management of the foreign exchange rate, general economic growth was constrained

by a resurgent inflationary pressure, high lending rate, the inability of the refineries to work

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at full capacity, and weak infrastructure support, especially epileptic power supply and

dilapidated intra-city road network.

The Privatization Programme was virtually stalled during the year, save for some

sales to core investors. Even though a cordial working relationship was observed between the

Executive and the legislative arms of government, the political gains could not be converted

into economic gains because of other untoward developments in the political arena that

tasked investor confidence. These included the perennial discontent in the Niger-Delta and

the disturbances in Plateau and Anambra States.

Proposed Solution

The OTC’s Bon Market has challenges that can only be resolved by the CBN because

it is the only institution that can provide liquidity and guarantee third party borrowing in

financing trading of government securities. The pivotal role of the CBN in the operations of a

vibrant bond market compels it to take the following actions to ensure the market exists.

Create and support a repo market that allows only PDMMs to participate. Since repos

play a vital role in bond trading, the CBN should manage and/or monitor daily repos on

collateralized government securities. This initiative can elevate the level of confidence in the

market and attract foreign investors such as hedge funds, mutual funds, and foreign

governments.

Collaborate with the DMO and SEC in the qualification and registration of PDMMs.

The registration process must set a ceiling for each member’s transactions in the repo market

based on capitalization. This process is important because it helps to establish the upper limit

that a PDMM can leverage its assets in bond purchasing and trading. Once a dealer reaches

the upper limit for the CBN’s margin rate based on capitalization, the systems monitoring

mechanisms will send out a red flag if a dealer attempts to effect a repo transaction that has

overleveraged its ability to pay even with collateralized high grade assets.

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Collaborate with the NSE and SEC in the qualification and registration of licensed

stockbrokers who are designated by their firms as principal bond traders in the repo market.

These individuals must have sufficient training to merit supervisory roles in bond trading and

must be willing to submit to the SEC’s periodic review of their licenses for any violation of

securities laws and other criminal conduct.

Guarantee, regulate and monitor foreign investments in treasury securities to ensure

that the CBN’s foreign exchange rate regimes are strictly adhered to in the massive trading of

treasury securities to foreign entities.

Guarantee, regulate and monitor surplus funds invested in the repo market by non-

financial institutions such as municipal governments, large corporations, high net worth

individuals, endowments and the like in the repo market.

The repo market is the engine that powers the bond market and creates equilibrium in

the supply and demand for trading government securities and other high grade debt of

companies in the private sector. The CBN’s monetary policy determines the supply of funds

in the repo market and the overall direction of cash movements in the capital markets.

Therefore, a vibrant bond market is possible only with the CBN action.

In analyzing the above hypothesis, the following table shows the level of significance

the measuring that could be employed to enhance the capacity of the Nigerian capital market

in mobilizing long term funds for economic development in Nigeria.

Market Development

The exchange implemented certain initiatives in 2007 to broaden participation in the

market, improve liquidity and generally propel the market to greater height. These initiatives

are in the important areas of capacity building, investor education, international cooperation

and new products development, including: All Share Index

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The exchange has since January 1984 published a stock exchange index. The index is

an aggregate of the market capitalization of all of the industrial equities listed in the market.

The computation of the index is explained below:

The NSE Index is given by the formula:

Current Market Value

------------------------ x 100

Base Market Value

or CMV

-------- x 100

BMV

n

= i=1paQa

------------------- x 100

n

Σ Pb Qb

I=1

Where

Pa = Current market price of an ordinary share as at the base

Qa = Current number of listed ordinary shares

Pb = Market price of an ordinary share as the base date

Qb = Number of listed shares as at the base date

= 1,2, …n

= Number of constituents in the index

Where changes other than price variations occur which affect the index, an adjustment

is made in order to eradicate the effects of such changes. Such adjustments are designed to

make the index after the changes equal to the index before the changes. The changes

envisaged here include new listings, delisting and increase in the issued capital of listed

companies. The procedure for effecting the adjustment is as follows:

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CMV = CMV0

------ ------

BMV BMV0

Where

CMV = Current Market value after the change

BMV = Base market value after the change

CMV0 = Old current market value (i.e. before the change)

BMV0 = Old base market value (i.e. before the change)

The new base market value is obtained as follows:

BMV = BMV0 x CMV CMV0

In applying the above formula to a situation where there is a new listing, we have the

following expression:

BMV = BMV0 x CMV

CMV0

Where:

BMV = Base make value after the adjustment to take account of

the new listing

CMV = Current market value including the value of new shares

BMV0 = Old base market value

CMV0 = Old current market value

The base adjustments are made on the day securities are listed. In a situation where there is a

delisting, the formula is explained thus:

BMV = Base market value after the adjustment to exclude the shares delisted

CMV = Current market value after deduction of the value of shares withdrawn

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BMV0 = Old base market value

CMV0 = Old current market value

The adjustment to the Base Market Value is made on the date the securities are

delisted and the adjusted Index becomes the new base as from the following day. In the case

of a Listed Company increasing its issued capital, the formula is explained thus –

BMV = Base market value after adjustment

CMV = Current market value

BMV0 = Old base market value

CMV0 = Current market value excluding value of rights

In the case of capital increase through the grant of pre-emptive rights to existing

shareholders, the adjustment is made on the ex-rights date. If rights were however granted to

other persons such as the general public, company directors, employees, etc., the adjustment

is made on the date the new shares are registered or listed on the Nigerian Stock Exchange. If

there is no transaction in either case on the said date, the adjustment is made on the day

transaction first takes place after the rights.

Remote Trading

In 2004, the exchange implemented a multi-pronged market development under

which market infrastructure and investor educator received high prominence, among other

issues that facilitate the development and growth of the Nigerian stock market in the desired

direction.

As at the end of the year, more than 50 stock broking firms have been enabled for

remote access to the trading engine. This has made it possible for more houses to trade daily

on the exchange, thereby boosting the liquidity of the market and the opportunity it offers for

price discovery.

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The exchange also relocated its area office in Abuja to a more accessible, spacious

and purpose-built facility and the existing trading infrastructure at the area office was

modernized and upgraded with the adoption of satellite communication medium for access to

the Trading Engine by dealers trading from the Federal Capital.

Number of Listed Companies

The average number of listed companies in the Nigerian stock market for 1980-1999

periods was 129 companies. At the end of 1999, the number of listed securities stood at 269

including 196 companies. This indicates that 10 more companies were listed in 1999 as

against 186 in 1998. Column 4 of Table 2 gives the trend for the study period.

On the African scene, the Nigerian stock market performed relatively well. The stock

market ranked 3rd in the number of listed companies with 196 after Egypt with 1032

companies and South African with 668 companies. In effect, the Nigerian stock markets

provide greater option to investors in terms of choice of equities than most African market

do. Over the years, the Nigerian stock market witnessed growth of equity listings, especially

in the 1990s. This was attributable to economic policies put in place by the government,

notable among which was privatization of public enterprises. Also, the establishment of

second-tier securities market (SSM) which allowed small/medium sized enterprises to

participate in the capital market. As at end of 1999 16 firms were listed in SSM market. The

market capitalization, which opened the year at -263.3 billion, closed the year at =300 billion.

This growth was attributed to new listings and recovery of equity prices.

The market turnover in 1999 at the exchange closed at 3.95 billion share worth -14.1

billion up of 88.1% and 3.7% respectively on the volume and value of shares traded in 1998.

A significant portion of the turnover in 1999 was linked with the internationalization of the

stock market, which recorded the first foreign listing on the Nigerian Stock Exchange. This

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represents a breakthrough in the exchange controls of the stock market, at the same time

enhancing opportunities for portfolio diversification by domestic investors.

The world stock market performance review in 1999 showed that the Nigerian stock

market was ranked 73 out of 97 countries based on percentage change in the price indices in

US dollars; 78 out of 105 countries when ranked by turnover ratio; and 87 out of 100 based

on average company size. Also, based on the market capitalization, value traded and number

of listed domestic companies in 1999; the Nigerian market failed to make the cop 40 in the

world (Standard and Poor’s Emerging Stock Markets Factbook. 2000).

Table 5.1: Growth in the Number of Listed Securities 1980-1999

Year

(1)

Government

Stock

(2)

Industrial

and Bonds

(3)

Equities (Including

Second-tier Securities

Market

(4)

Total

(5)

Percentage

Change

(6)

1980 54 12 91 157 0.00

1981 56 14 93 163 3.82

1982 57 18 93 168 3.07

1983 61 5 92 178 5.95

1984 56 27 92 175 -1.69

1985 57 28 96 181 3.43 1986 58 29 99 186 2.76

1987 54 31 100 185 -0.54

1988 51 35 102 188 1.62

1989 47 40 111 198 5.32

1990 43 43 131 217 9.60

1991 40 57 142 239 10.14

1992 36 62 153 251 5.02 1993 32 66 174 272 8.37

1994 39 70 177 286 5.15

1995 28 67 181 276 -3.50

1996 24 69 183 276 0.00

1997 22 60 182 264 -4.35

1998 19 59 186 264 0.00 1999 15 58 196 269 1.89

Source: Nigerian Stock Exchange, Annual Reports and Accounts, Various Years.

The exchange all shares index established in 1985 helped in gauging the mood of the

market. The index witnessed an astronomical increase of 131% from 2,205 in 1994 when it

closed at 5,092.2 in 1995. This increasing trend continued until 1998 when it decreased from

218

6,440.5 in 1997 to 5,716.1 in 1998 and 5,266.4 in 1999. This was due to the backdrop of a

series of upward adjustment in the Minimum Rediscount Rate (MRR), which attracted funds

away from the capital market, among other economic problems associated with the high

interest rates in the economy. In percentage term, the figures represents an annual percentage

change of 37.3%, -7.9%, -11.2% and -7.9% in 1996, 1997, 1998 and 1999 respectively. The

trend is shown in table 3.

In April 1999, the Nigerian Stock Exchange launched its Automated Trading System

(ATS). This new computerized system was designed to make the market more efficient and

transparent. This new computerised system complements the Central Clearing Depository

System (CCDS) which was introduced in 1997.

Table 5.2: The Nigerian Stock Exchange All-Shares Index Percentage Change (1984-

1999)

Year Index Change (%) Cumulative Change (%)

1984 100 -- --

1985 127.3 27.3 27.3

1986 163.8 28.7 56.0

1987 190.9 16.5 72.5

1988 233.6 22.4 94.9

1989 325.3 39.3 134.1

1990 513.8 57.9 192.1

1991 783.0 52.4 244.5

1992 1,107.6 42.5 285.9

1993 1,548.8 39.8 325.8

1994 2,205.0 42.4 368.1

1995 5,092.2 130.9 499.1

1996 6,992.1 37.3 536.4

1997 6,440.5 -7.9 528.5

1998 5,716.0 -11.2 517.2

1999 5,266.4 -7.9 509.4

Source: Nigerian Stock Exchange, Annual Reports and Accounts, Various Years.

219

5.2.1 DISCUSSION

Following the Barback Report, the Lagos Stock Exchange was set up in 1959. With

enactment of the Lagos Stock Exchange Act 1961, it commence business in June, 1961 and

assumed the major activities of the stock market by providing facilities for the public to trade

in shares and stocks, maintain my fair prices through stock-jobbing and restricting the

business to its members.

The Lagos Stock Exchange was renamed the Nigerian Stock Exchange in 1977 with

the aim of providing facilities to the public in Nigeria for the purchase of sale of funds, stocks

and shares of any kind and for the investment of money. Additionally, as earlier stated in this

study, the Nigerian Capital Market is mandated to control the granting of a quotation on the

Stock Exchange in respect of funds, stocks and shares of any company, government,

municipality local authority or other corporate body; to regulate the dealings of members,

their interest and those of their clients, and to promote support of propose legislative or other

measures affecting the aforementioned object.

According to its memorandum and Article of Association, the capital market was

incorporated as a private non-profit organization limited by guarantee to undertake three

basic functions, to provide trading facilities for dealing in securities listed on it, to oversee

activities relating to trading in securities; and to enhance the flow of long-term capital into

productive investment and ensuring fairness of prices at which quoted securities are traded.

This study examines whether Nigeria capital market promotes national economic

development between the periods 1980 to 2009.

However, this study’s findings of the roles of the Nigeria capital market in facilitating

wealth creation and provision of long-term funds needed for economic development in

Nigeria from 1980-2009, indicate that Nigeria capital market plays significant roles in

220

facilitating wealth creation and provision of long term funds needed for economic

development in Nigeria. This finding of the study agreed with a similar study on Nigeria

capital market by Osinubi (1998:24) in which he stated that “there exist positive relationship

between the economic growth and the measures of stock market development used.

Following from the above views, it is an empirical finding of this study that the

Nigeria capital market operations in promoting national economic development demonstrate

the following:

• The challenges confronting Nigerian capital market hinder efficient mobilization of

long-term fund for economic development in Nigeria.

• There are measures to be employed to enhance the capacity of the Nigeria capital

market in mobilizing long-term fund for economic development in Nigeria

• That recapitalization of banks has not increased the returns on investment of

shareholders thereby not creating wealth.

These findings of the research underscore the relevance of this study’s theoretical

paradigm which emphasized that there is apparent connectedness between capital market,

privatization of public enterprises, and economic growth. Privatization provides additional

listing on the stock market enlarges equity shares and injects new life into the market. The

capital market, therefore speed-up economic growth by regulating the restructuring of

ownership of one time public enterprises. However, literatures have produced a positive

relationship between capital market developments and also show a negative effect on growth.

221

CHAPTER SIX

SUMMARY, RECOMMENDATIONS AND CONCLUSION

6. I SUMMARY

The study examines the roles played by the Nigerian capital market in mobilizing

long-term funds for economic development in the country. That is, the examination of how

the capital market creates wealth and long-term capital required for development through

poverty reduction, infrastructural development, and development in health and social

services. Mobilization of resources for national economic development has long been the

central focus of development scholars. As a result of this, the centrality of saving and

investment in economic growth has been given considerable attention in the literature

(Rostow, 1960; Malivaud, 1979; Soyode, 1990; Aigbokan, 1975; Samuel, 1996; Demirgue-

kunt and Levine, 1996). For sustainable growth and development, funds must be effectively

mobilized and allocated to enable businesses and the economy harnessed their human,

materials and management resources for optimal output. The capital market is an economic

institution, which promotes efficiency in capital market formation and allocation. The capital

market enables governments and industries to raise long-term capital for financing new

project, and expanding and modernizing industrial/commercial concerns. If capital resources

are not provided to those economic areas, especially industries where demand is growing and

which are capable of increasing production and productivity, the rate of expansion of the

economy often suffers. A unique benefit of the stock market to corporate entities is the

provision of long-term, non-debt financial capital. Through the issuance of equity securities,

companies acquire perpetual capital for development. Through the provision of equity

capital, the market also enables companies to avoid overreliance on debt financing, thus

improving corporate debe-to-equity ratio. This study like others before it confirms that there

exist positive relationship between the economic growth and the measures of capital market

222

development. This result is a reflection of structural rigidities prevailing in the economy

which makes the capital market more of an appendage of the government institutions rather

than a market driven by efficiency through the interplay of force of demand and supply. This

is even more pronounced in the nonchalant reactions of the stock market index to shocks in

the economy contrary to what obtain in the developed economies. To buttress this point, the

neutrality of the dummy used to represent government policy, (the structural Adjustment

program) showed the degree of insensitivity of capital market development to

macroeconomic and sector policies.

The overbearing influence of the per capita income indicates that an increase in per

capita income is very crucial for economic growth and it may increase savings, which may in

turn help in boosting capital market activities, other things remaining the same. The place of

political stability is well pronounced by the result. For an economy to growth there must be

political stability, which was lacking in the period from 1980-1999. Political stability helps in

instilling confidence in the market operators thereby enhancing the development of the

market.

Another major outcome of the study was the fact that the capital market during the

period was faced with legislation and policy instability. Thus, the enabling environment was

not so conducive and this partly affected the activity of the market and its slow development

as witnessed during period under study. The attractiveness of the capital market as a veritable

source of funds was therefore jeopardized.

The results of the study invariably showed that some serious policy issues will have to

be put in place to promote capital market development and stimulate economic growth. For

example, the liberalization of restriction on portfolio and dividend flow must be high on the

agenda of reform (Nyong, 1997). Also, the international integration of the capital market

223

must be vigorously and relentlessly pursued. Privatization of the public enterprises and the

deregulation of the financial sector must be accorded top priority.

6.2 RECOMMENDATIONS

The findings from this study raise some policy issue and recommendations, which

will reinforce the link between the capital market and national economic development in

Nigeria. The study identified a number of factors that account for lack of interest by Nigerian

companies in being listed in the exchange which includes (i) high cost of public quotation,

(ii) reluctance to dilute ownership and control through quotation (iii) the interest rate

structure in the past which favored debt financing over equity financing, and (iv) strident

requirement for listing. Liquidity remains a crucial factor in capital market. Finance is the

life-blood for any business enterprise. Funding for economic activities must be adequate and

appropriate. The issue of adequacy is easily comprehended as the evidence of under-funded

and consequently abandoned projects abound everywhere. What is however not clear to many

is that some viable projects have also collapsed due to the use of short-term funds, usually in

form of bank loans to finance projects with long gestation periods. The need to repay such

loans before the projects can generate sufficient funds to sustain them had often led to the

collapse of such businesses. This study recommends that the capital market being the

segment of the financial market that facilitates the mobilization and allocation of medium and

long-term funds through the issuance and trading of financial instruments should be optimally

developed. These optimal developments may include developing and sustaining on a self

budget, electing the directors including the director general of the Nigerian security exchange

and security and exchange commission. And the removals of all laws that account for lack of

interest by Nigerian companies being listed. As the major source of appropriate long-term

funds, the capital market is obviously crucial to any nation’s economic development.

Specifically, the capital market facilitates economic growth by, among other things,

224

mobilizing savings from numerous economic units such as governments and the private

sector. It also improves the efficiency of capital allocation through a competitive pricing

mechanism. The impact of global financial crisis such as recession, global inflation, global

commodity demand and prices, world trade, international financial market etc significantly

hindered the efficiency of the market in mobilizing long-term funds for economic

development in the country. It is of the view of this study too that privatization of the public

enterprises such as the transport sector, power and telecommunications should be pursued

with all seriousness it deserves. The need for financial sector deregulation which allows

market forces to determine the allocation of credit can not be overemphasized.

6.3 CONCLUSION

That the capital market promotes economic growth is not in doubt. It serves as an

important mechanism for effective and efficient mobilization and allocation of savings, a

crucial function for an economy desirous of growth.

This study attempted to place this role in the Nigerian context between the period of

1980 and 2009. By the use of some notable capital market development indicators, the

relationship between capital market development and economic growth was found to be

positive. This suggests that for a significant growth the focus policy should be on measures to

promote growth in the capital market.

The Nigerian capital market has a bright prospect given the recent policy direction

especially the abrogation of all laws that hitherto hamper its effective and efficient

functioning. Also, the internationalization, the improvement in the infrastructural facilities in

the market in line with what obtains in the developed market and also the present democratic

dispensation will all work individually and jointly to ginger the prospect of the capital

market.

225

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233

APPENDICES

APPENDIX ONE:

SECURITIES AND EXCHANGE COMMISSION

The History

The origin of the Securities and Exchange Commission dates back to 1962, when an

ad hoc consultative and advisory body, known as the Capital Issues Committee, was

established under the aegis of the Central Bank of Nigeria (CBN). Its mandate was to

examine applications from companies seeking to raise capital from the capital market and

recommend the timing of such issues to prevent issues clustering which could overstretch the

market’s capacity. The Committee operated within the Central Bank of Nigeria unofficially

as a capital market consultative and advisory body with no regulatory framework.

The first head quarters

An increase in the level of economic activities, coupled with the promulgation of the

Nigerian Enterprises Promotion Decree in 1972, necessitated the establishment of a body

backed by law to regulate capital market activities hence the creation of the Capital Issues

Commission to take over the activities of the Capital Issues Committee. The Capital Issues

Commission was established with the promulgation of the Capital Issues Commission Decree

in March 1973.

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The new body had a board of nine (9) members, including a representative of the

Central Bank of Nigeria who served as Chairman, while the other eight (8) members were

drawn from some Federal Ministries, the industrial and financial sectors of the economy.

In order to cope with emergent challenges, the powers of the Capital Issues Commission had

to be further enhanced. A Financial System Review Committee was set up by the federal

government to review capital market activities and proffer ways of developing the market.

The recommendations of the Financial System Review Committee in 1976, led to

the establishment of the Securities and Exchange Commission following the promulgation of

the Securities and Exchange Commission Decree No. 71 of 1979 to supersede the Capital

Issues Commission in 1979.

The Commission had more powers to regulate and develop the Nigerian capital

market, in addition to determining the prices of issues and setting the basis for allotment of

securities. Unlike its two predecessors, the Commission at this stage was excised from the

CBN, although it continued to receive funding from the apex bank.

It also had an enlarged 12-member board with a CBN representative as Chairman.

Other members were drawn from the Ministries of Finance, Trade and Industries, the

Nigerian Stock Exchange and the Nigerian Enterprises Promotion Board; other members

were nominated on the basis of individual merit.

The Commission took off effectively on January 1, 1980 with 51 staff out of which

seven (7) were seconded (for a period of three years) from the Central Bank of Nigeria

(CBN) while a few senior and support service staff were recruited.

Nine (9) years after the establishment of the Securities and Exchange Commission,

the enabling law, Decree No. 7 of 1979, was re-enacted as SEC Decree No. 29 of 1988 with

additional provisions to address observed lapses in the previous arrangement and to enable

the Commission pursue its functions more effectively.

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To further enhance the Commission's pursuit of its objective of investor protection, a

review of the capital market was carried out in 1996 by a seven - man panel headed by Chief

Dennis Odife, based on the panel's recommendations, a new Act known as "The Investment

and Securities Act No. 45 of 1999" was promulgated on May 26, 1999. The Act repealed the

SEC Act of 1998. The new Act was expected to promote a more efficient and virile capital

market, pivotal to meeting the nation's economic and developmental aspirations.

The Investment and Securities Act (ISA) was further reviewed, amended

and subsequently passed into law in 2007. The SEC currently derives its powers from the

ISA 29 of 2007.

The Securities and Exchange Commission (SEC) joined the International

Organization of Securities Commissions (IOSCO) in June 1985. The IOSCO is a body of

Securities Commissions with the goal of cooperating in developing, implementing and

promoting adherence to internationally recognized and consistent standards of securities

market regulation. The Nigerian SEC qualified as an Appendix ‘A’ Signatory to the IOSCO

MMOU in 2006 and has continuously been benchmarking its market rules and regulations

against those of IOSCO, the global international standards setter.

SOURCE: http://www.sec.gov.ng/our-history.html

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APPENDIX TWO

MONETARY POLICY AND FINANCIAL SECTOR REFORMS IN NIGERIA

The Conduct of Monetary Policy

Over the years, the objectives of monetary policy have remained the attainment of

internal and external balance. However, emphasis on techniques or instruments to achieve

those objectives has changed over the years. There have been two major phases in the pursuit

of monetary policy, namely, before 1986 and since 1986. The first phase placed emphasis on

direct monetary controls, while the second relies on market mechanisms.

Monetary Policy Before 1986

The economic environment that guided monetary policy before 1986 was

characterized by the dominance of the oil sector, the expanding role of the public sector in the

economy and over-dependence on the external sector. In order to maintain price stability and

a healthy balance of payments position, monetary management depended on the use of direct

monetary instruments such as credit ceilings, selective credit controls, administered interest

and exchange rates, as well as the prescription of cash reserve requirements and special

deposits. The use of market-based instruments was not feasible at that point because of the

underdeveloped nature of the financial markets and the deliberate restraint on interest

rates. The most popular instrument of monetary policy was the issuance of credit rationing

guidelines, which primarily set the rates of change for the components and aggregate

commercial bank loans and advances to the private sector. The sector allocation of bank

credit in CBN guidelines was to stimulate the productive sectors and thereby stem

inflationary pressures. The fixing of interest rates at relatively low levels was done mainly to

promote investment and growth. Occasionally, special deposits were imposed to reduce the

amount of free reserves and credit-creating capacity of the banks. Minimum cash ratios were

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stipulated for the banks in the mid-1970s on the basis of their total deposit liabilities, but

since such cash ratios were usually lower than those voluntarily maintained by the banks,

they proved less effective as a restraint on their credit operations.

From the mid-1970s, it became increasingly difficult to achieve the aims of monetary

policy. Generally, monetary aggregates, government fiscal deficit, GDP growth rate, inflation

rate and the balance of payments position moved in undesirable directions. Compliance by

banks with credit guidelines was less than satisfactory. The major source of problem in

monetary management was the nature of the monetary control framework, the interest rate

regime and the non-harmonization of fiscal and monetary policies. The monetary control

framework, which relied heavily on credit ceilings and selective credit controls, increasingly

failed to achieve the set monetary targets as their implementation became less effective with

time. The rigidly controlled interest rate regime, especially the low levels of the various rates,

encouraged monetary expansion without promoting the rapid growth of the money and

capital markets. The low interest rates on government debt instruments did not sufficiently

attract private sector savers and since the CBN was required by law to absorb the

unsubscribed portion of government debt instruments, large amounts of high-powered money

were usually injected into the economy. In the oil boom era, the rapid monetization of foreign

exchange earnings resulted in large increases in government expenditure, which substantially

contributed to monetary instability. In the early 1980s, oil receipts were not adequate to meet

increasing levels of demands and since expenditures were not rationalized, government

resorted to borrowing from the Central Bank to finance huge deficits. This had adverse

implications for monetary management in Nigeria.

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Monetary Policy between 1986 and 1998

The Structural Adjustment Program (SAP) was introduced in July, 1986 against the

crash in international oil market and the resultant deteriorating economic conditions in the

country. It was designed to achieve fiscal balance and balance of payments viability by

altering and restructuring the production and consumption patterns of the economy,

eliminating price distortions, reducing the heavy dependence on crude oil exports and

consumer goods imports, enhance the non-oil export base and achieve sustainable growth.

Other aims were to rationalize the role of the public sector and accelerate the growth

potentials of the private sector. The main strategies of the program were the deregulation of

the external trade and payments arrangements, the adoption of a market-determined exchange

rate for the national currency, substantial reduction in complex price and administrative

controls and more reliance on market forces as a major determinant of economic activities.

The objectives of monetary policy since 1986 have remained the same as in the earlier

period - the stimulation of output and employment, and the promotion of domestic and

external stability. In line with the general philosophy of economic management under SAP,

monetary policy was aimed at inducing the emergence of a market-oriented financial system

for effective mobilization of financial savings and efficient resource allocation. The main

instrument of the market-based framework is the open market operations (OMO). This is

complemented by reserve requirements and discount window operations. The adoption of a

market-based framework such as OMO in an economy that had been under direct control for

long, required substantial improvement in the macroeconomic, legal and regulatory

environment.

In order to improve macroeconomic stability, efforts were directed at the management

of excess liquidity; thus a number of measures were introduced to reduce liquidity in the

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system. These included the reduction in the maximum ceiling on credit growth allowed for

banks; the recall of the special deposits requirements against outstanding external payment

arrears to CBN from banks, abolition of the use of foreign guarantees/currency deposits as

collaterals for Naira loans and the withdrawal of public sector deposits from banks to the

CBN. Also effective August 1990, the use of stabilization securities for purposes of reducing

the bulging size of excess liquidity in banks was re-introduced. Commercial banks' cash

reserve requirements were increased in 1989, 1990, 1992, 1996 and 1999.

The rising level of fiscal deficits was identified as a major source of macroeconomic

instability (Ojo, 2001). Consequently, government agreed not only to reduce the size of its

deficits but also to synchronize fiscal and monetary policies. By way of inducing efficiency

and encouraging a good measure of flexibility in commercial banks' credit operations, the

regulatory environment was improved. Consequently, the sector-specific credit allocation

targets were compressed into four sectors in 1986, and to only two in 1987. From October

1996, all mandatory credit allocation mechanisms were abolished. The commercial and

merchant banks were subjected to equal treatment since their operations were found to

produce similar effects on the monetary process. Areas of perceived disadvantages to

merchant banks were harmonized in line with needs to create a conducive environment for

their operations.

In recognition of the fact that well-capitalized banks would strengthen the banking

system for effective monetary management, the monetary authority increased the minimum

paid-up capital of commercial and merchant banks in February 1990 to 50 and 40 million

naira from 20 and 12 million naira, respectively. Distressed banks whose capital fell below

existing requirement were expected to comply by 31st March 1997 or face liquidation.

Twenty-six of such banks comprising 13 each of commercial and merchant banks were

liquidated in January, 1998. Minimum paid up capital of merchant and commercial banks

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was raised to a uniform level of 500 million naira with effect from 1st January 1997, and by

December 1998, all existing banks were to recapitalize. The CBN brought into force the risk-

weighted measure of capital adequacy recommended by the Basle Committee of the Bank for

International Settlements in 1990. Before then, capital adequacy was measured by the ratio of

adjusted capital to total loans and advances outstanding.

The CBN in 1990 introduced a set of prudential guidelines for licensed banks, which

were complementary to both the capital adequacy requirement and Statement of Standard

Accounting Practices. The prudential guidelines, among others, spelt out the criteria to be

employed by banks for classifying non-performing loans. The CBN has continued to examine

and monitor banks in order to promote stable banking system. Also the Bank handles the

problem of distressed and illiquid banks. The CBN imposes holding actions and revokes

licenses of affected banks as well as encourages mergers and acquisitions. In an effort to

improve the operations of the money market, an auction-based market for treasury securities

was introduced in 1989; and these treasury instruments were made bearer bills to enhance

transferability and promote secondary trading.

By mid-1992, the major hurdle to the introduction of OMO remained the continued

imposition of credit ceiling on the banks. From September 1, 1992, the CBN, lifted credit

ceiling on individual banks that met CBN specified criteria on selective basis in respect of

statutory minimum paid-up capital, capital adequacy ratio, cash reserve and liquidity ratio

requirements, prudential guidelines, sector credit allocation and sound management.

Meanwhile, the use of stabilization securities for mopping excess reserves in banks was

intensified and three discount houses opened their doors for business from March 1993. A

fourth discount house commenced operation in 1995 and the fifth one in 1996. On the 30th of

June 1993, the CBN commenced OMO in treasury securities with banks through discount

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houses on a weekly basis. OMO has remained a major tool of monetary policy in Nigeria

with its effective use in moderating the system's liquidity.

Central Bank of Nigeria’s Interventions and Foreign Exchange Market.

In the analysis, we have concentrated on the short run effects of intervention on the

monetary aggregate, some observers have argued that although full sterilization can be

achieved in the short run; there may not be full sterilization in the long run (Simatele, 2003).

Inability to achieve full long run sterilization lends more weight on exchange rate

considerations. In a study of sterilization in Germany, Von Hagen (1989) finds out that the

Bonds bank sterilizes in the short run but not in the long run. Indeed, being a monetary

targeting bank as well, it might as well be that the Central Bank was not able to fully sterilize

its interventions in the long run. This is even more likely in the case for Nigeria since

political interference in preference for stable exchange rates over achieving monetary goals is

sometimes very significant. The focus on short-term sterilization in this study is sufficient for

analyzing the effect of intervention on the short-term fluctuations in the exchange rate.

The overall conclusions are as follows. First, the potency of monetary policy in

Nigeria has increased since the reforms

Second, the Treasury bill rate seems to be a better indicator of the central bank policy stance

than the deposit rate. The importance of the Treasury bill rate suggests a good policy option

for monetary targeting.

Third, monetary aggregate (M2) and debt service obligations are important in

understanding price movements in Nigeria.

Fourth, the exchange rate seems to be more useful than the monetary aggregate. This

underscores the importance of a stable exchange rate. However, foreign exchange

intervention does not seem to provide the complete solution. Possible options or

complements include exchange rate targeting. This approach is characterized, as the name

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suggests, by the announcement of official target ranges for the exchange rate at one or more

horizons, and by explicit acknowledgment that realistic exchange rate is the overriding goal

of monetary policy. Exchange rate targeting is also characterized by increased

communication with the public about the plans and objectives of the monetary policymakers,

and, in many cases, increased accountability of the central bank for attaining those objectives.

Financial sector deregulation is a policy, which allows market forces to determine the

allocation of credit, rather than government fiat. It includes the liberalization of credit

controls, foreign exchange control, licensing of banks and interest rates and other institutional

reforms (Ojo, 1991). The efficacy of money and capital markets is enhanced under financial

sector deregulation within which competition is allowed and within which market forces are

unfettered. It is argued that financial deregulation improves the efficiency of resource

allocation (Stiglitz, 1998). This is because it increases savings. The improved efficiency, with

which resources are allocated among alternative investment projects, raises the rate of

economic growth. Thus, it offers the opportunity for many diversified financial instruments to

be at play. It also ensures that capital is mobilized from several avenues other than the

traditional banking sectors. The policy raises investor confidence and serves as an incentive

for the flow of capital and investment. Thus, financial sector deregulation has been perceived

to foster development and increase growth in the long run (Levine, 1997). It has also been

seen, in developing countries, to stimulate domestic savings and growth and reduce excessive

dependence on foreign capital flow (Demirguc-Kunt & Detragiache, 1998).

It seems these benefits of deregulation could not be appropriated by the Nigerian

economy before 1986. This is because monetary policy before that period was regulated by

government through different Decrees and Acts. The regulation of the financial sector is

derived from the fact that the system is primarily involved in managing customers’ resources,

and there is therefore need to check fraud and malpractices, as well as to ensure that the

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financial system operates in consonance with the desired economic system (Ojo, 2001). Thus,

the regulation of the financial system is expected to support the achievement of efficiency,

stability and equity in the system and the economy generally.

The design and implementation of monetary policy between 1970 and 1985 (under

regulation) had the primary objectives of maintaining relative price stability, a healthy

balance of payments position and stimulation of output and employment. Throughout this

period, monetary policy depended on the use of direct monetary instruments, such as the

prescription of aggregate credit ceilings, use of selective credit controls, and imposition of

special deposits. However, monetary policy was impotent during the period of economic

control due to the ineffectiveness of the monetary policy instruments, coupled with the

inappropriate control of some monetary indicators and lack of harmony between fiscal and

monetary policies (Ojo, 2001).

For instance, under the regime of control, interest rates were administratively fixed at

relatively low levels in the hope that these would enhance investment and output. Such an

action only enhanced the demand for credit while stifling the supply of savings especially

when inflationary pressures were high. Moreover, credit ceilings as a monetary policy

instrument were ineffective. Control helped to sustain inefficiency in the banking industry. It

protected the weaker banks while preventing the growth of the more efficient ones. It also

promoted the growth of credit and general operations of the unregulated markets.

Moreover, the lack of harmony between fiscal and monetary policies hindered the

effectiveness of monetary policy between 1970 and 1985. There is a direct link between

monetary policy and the fiscal operations of the government. When deficit fiscal policy is

taken, there is a possibility that part of that deficit will be financed by the government

through borrowing from the banking system. The portion to be financed from the domestic

banking system is part of the aggregate bank credit to the economy. There are serious

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implications when that portion is exceeded and/or is partly or wholly accounted for by the

Central Bank. In this connection, the magnitude and pattern of government fiscal operations

have been a major source of ineffective monetary control in Nigeria (Ojo, 2001).

The adverse economic trends during the period 1970-1985 prompted the adoption of

the Structural Adjustment Program, which was introduced formally in July 1986. Its

underlying philosophy was to ultimately institute a more efficient market system for the

allocation of resources, with the implication that the excessive control of the previous two

decades would be gradually eliminated or reduced to a level that would not inhibit growth

and development. Generally, the ultimate objectives of monetary policy include: promotion

of price stability, maintenance of external equilibrium and stimulation of output and

employment. In the specific environment of financial and economic liberalization, monetary

policy was also to stabilize the economy in the short-run and to induce the emergence of a

market-oriental financial sector for effective mobilization of financial savings and efficient

allocation of resources.

To achieve these objectives of monetary policy and to guide the operations of specific

institutions, different Decrees and Acts were promulgated. These Decrees and Acts include

the following: The Central Bank of Nigeria (CBN) Decree 24 of June 24, 1991. The Decree

was to strengthen the supervisory activities of CBN in addition to giving it powers in the

areas of bank examination, monetary management and enforcement of prudential standards in

the bank and non-bank financial institutions. The Banks and Other Financial Institutions

Decree (BOFID) 25 of June 24 1991 were promulgated to centralize the function of licensing

as well as regulating banks and other financial institutions. This Decree was amended in

1997, 1998 and 1999. The Nigerian Deposit Insurance Corporation (NDIC) Decree 22 of

June 15, 1988 set up the NDIC and outlined the procedure for providing deposit insurance

and related services to banks in order to promote confidence in the banking industry. The

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Securities and Exchange Commission (SEC) Act of 1979 set up SEC as the apex regulatory

organ of the capital market. The Act enjoins SEC to promote an orderly and active capital

market. The Companies and Allied Matters Decree of 1990 further empowered SEC to

approve and regulate mergers and acquisitions and authorize the establishment of unit trusts.

The Insurance Special Supervision Fund (Amendment) Decree 62 of 1992 set up the Nigerian

Insurance Supervisory Board, which was charged with the effective administration,

supervision, regulation and control of the insurance business in Nigeria. Also, the Federal

Mortgage Bank of Nigeria (FMBN) Decree 7 of 1977 set up FMBN partly to license and

regulates mortgage institutions. Other development that took place include the establishment

of the Money Laundering Decree 3 of 1995, which was designed to prevent drug money and

other illegally acquired assets from entering into the financial system in order to forestall the

damaging effects of such monetary injection. The Failed (Recovery of Debt) and Financial

Malpractices in Banks Decree 18 of 1994 was promulgated to facilitate the prosecution of

those who contributed to the failure of banks and to recover the debts owed the failed banks.

To further strengthen banking institutions, the paid-up capital of commercial and

merchant banks was raised from fifty and forty million naira respectively to a uniform capital

base of five hundred million in 1998 and one billion in 2001. By the year 2005, all

commercial banks are expected to raise their capital base to twenty-five billion naira. This

policy is expected to curb banking distress arising from inadequate capital base. Furthermore,

the autonomy of the CBN was fully restored by the CBN (Amendment) Decree of 1998. With

this, the CBN was empowered to carry out its traditional and developmental responsibilities

without fear or favor. It needs to be pointed out here, also, that the discount window facilities

were expanded in September 1998 with the admittance of three new market instruments to be

traded at the Open Market Operations (OMO). These include: the Nigerian Deposit Insurance

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Corporation (NDIC), Bankers’ Acceptance (BA) and the Negotiable Certificates of Deposits,

in addition to the existing Nigerian Treasury Bills and Nigerian Treasury Certificates.

All these developments took place to achieve some identified macroeconomic

objectives. For instance, at the commencement of the program, the traditional instruments

were fine-tuned to deal with the excess liquidity in the economy. This was done particularly

to dampen inflationary pressure and restrict the demand for the limited supply of foreign

exchange. Several measures were added to fight the growth of excess liquidity. These include

rationalization of sector credit control so as to give a larger measure of discretion to banks in

respect of their credit operation; deregulation of interest rates to improve efficiency in

savings mobilization and resource allocation; use of stabilization security to put in check the

incidence of excess liquidity; enhancing the minimum paid-up capital of commercial and

merchant banks; and the use of Open Market Operation (OMO) in the secondary market in

buying and selling of government securities (Ojo, 2001).

Although monetary policy during deregulation has apparently improved economic

performance in a handful of countries such as Ghana, Botswana and Mauritius (see Fry,

1978; Khatkhate, 1988; King and Levine, 1993; Ndekwu, 1995), it has led to financial

distress and economic retardation in the others, including Nigeria (Corbo and De Melo, 1987;

World Bank, 1989; Sundararajan and Balino, 1991; Athukorala and Rajapatirana, 1993 and

Anyanwu, 1995).

Sector Reclassification

One new subsector-Airline Services was created on the Daily officially list. By this

action, the number of subsectors in the equity sector of the Daily Official List increased to 32.

Also, Afriprint Nigeria Plc was reclassified on the Daily Official List from Textiles subsector

to Agriculture/Agro-Allied subsector to take account of changes that have occurred in the

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company. Managed Funds subsector was renamed “Other Financial Institutions” to permit the

listing of more companies providing ancillary financial services within the group.

Delisting in 2007

Eleven securities were delisted during the period under review:

CFAO Nigeria Plc (Equity), CFAO (Nig) Plc Loan Stock, CFAO Redeemable Debenture

Stock, CFAO Unsecured Debenture Stock (USDS), BHN Plc, FRN21st DS 2007, FRN, 24th

DS 2006, FGN 25th Floating Rate Bond 2006, 2nd FGN Bond 2007 Series 2, 2nd FGN Bond

2007 Series 4, 2nd FGN Bond 2007 Series 4

Market Activities

The DG of SEC affirms that, the flurry of activities that once characterized the stock

exchange appears to be gradually returning. According to him the turnover of 7.96 billion

shares worth N42.4 billion in 121,940 deals was recorded this month, in contrast to a total of

7.8 billion shares valued at N40.15 billion exchanged during the month of March in 131,419

deals. He said that the trading volume and value rose by 2.0% and 5.5%, respectively when

compared with the preceding month, however, these were lower than the preceding month’s

growth rates of 21.15% and 8.53%. Consequently he said that the total turnover between

January and April 2009 was 27.15 billion shares valued at N50.55 billion. In the comparable

period during 2008, 85.03 billion units valued at N1.25 trillion were traded he averred.

He revealed that the banking sub-sector was the most active (measured by turn

volume) with traded volume of 5.7 billion shares valued at N31.3 billion exchanged in 66,177

deals while the insurance sub-sector was second with traded volume of 819.01 million shares

valued at N694.3 million exchanged in 9,444 deals. The Information Communication and

Technology sub-sector according to him came third with transaction volume of 351.4 million

shares valued at N479.7 million traded in 1,525 deals.

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He said that four banks occupied the top positions in the most active list according to

him Wema Bank Plc was the most active stock with transaction volume of 2.88 billion

shares followed by Guaranty Trust Bank Plc with 522.2 million shares while Zenith Bank Plc

placed third with 271.8 million shares. He said further that the First Bank of Nigeria Plc

occupied the fourth rank with 268.81 million shares traded. Summarily he said, the 10 most

active stocks accounts for 5.13 shares of 54.5% of the total shares traded during the month

www.centralbanknigeria.com.

On market capitalization he said the increase in market capitalization can be attributed

to the rise in prices of some equities. According to him the 215 listed equities accounted for

N4.9 trillion or 64.55% of total market capitalization, up by 9% from the N4.5 trillion or

62.6% recorded in March. He said the top five equities with market capitalization of N1.4

trillion were dominated by the banks with three representatives. The Breweries and

Food/Beverages & Tobacco sub-sectors had one representative each in the top 5 he said.

Similarly, according to him the top 10 equities accounted for N2.24 trillion of the total

market capitalization www.centralbanknigeria.com.

He revealed that the Fidelity Bank Plc dropped out of the top 20 table to allow the

entry of Benue Cement Company Plc, which recorded a 21.6% increase in market

capitalization from N61.83 billion to N75.2 billion. In comparison with the preceding month

according to him , three banks – First Bank of Nigeria Plc, Bank PHB Plc and Afribank

Nigeria Plc suffered decline in market capitalization while Ecobank Nigeria Plc did not

record any change in market capitalization on account of the imposition of technical

suspension. The remaining companies recorded increased market capitalization

www.centralbanknigeria.com.

The DG revealed further that the market capitalization of the top 20 companies

totalled N3.2 trillion, representing 65.3% of the equity market and 42.15% of the entire

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market capitalization, up by 13.65% from the N2.81 trillion of the preceding month. First

Bank of Nigeria Plc retained the position of the most capitalized stock for the month, with the

market capitalization of N385.12 billion, down by 2% from the N392.83 billion recorded in

March. According to him Nigerian Breweries Plc retained the second position with a 20.3%

increase in market capitalization from N270.4 billion to N325.2 billion while Zenith Bank Plc

moved up from the fourth to the third rank with 22.34% increase in market capitalization

from N19.71 billion to N241.125 billion. He concluded that UBA Plc and Dangote Sugar

Refinery Plc occupied the 4th and 5th positions to complete the top 5 with 34%and 28% increase

in market capitalization in April www.centrabanknigeria.com.

Table 18: Ten Most Capitalized Stocks

S/NO Company Market Cap (Nbn) 1. First Bank 383.90 2 Nigeria Breweries 325.19 3 Zenith Bank 237.12 4 UBA 230.87 5 Dangote Sugar 206.40 6 Ecobank 201.82 7 GTB 194.88 8. Intercontinental 154.92 9 Oceanic Bank 153.34 10 Guinness 150.60 Source: NSE, Leadcapital Computation On the trading right the DG revealed that the Exchange evolving derivatives market

recorded some activity, with investors trading rights in four companies. In all according to

him 152 deals valued at N1.04 billion were executed in this market segment in 2005, up by

30.2% on the value of transactions in the previous year. The companies whose rights were

traded last year are:-

Benue Cement Co. Plc. West African Portland Cement Co. Plc. Flour Mills of Nigeria Plc.

Union Bank of Nigeria Plc

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Activity in the Secondary Market

The DG of SEC said that the activity in the secondary market was influenced by the

improved awareness of the opportunities in the stock market, improved operating results by

some quoted companies, large available float (especially in the banking and insurance

sectors, sustained inflow of pension funds, and low interest rates on deposits in the money

market.

He revealed that the turnover on the exchange closed the year 2009 at N2.1 trillion or

19.5% of GDP, up by 343.7% on the N470.25 billion (2.6% of GDP) recorded in 2006.

According to him average daily activity rose from 570.6 million shares worth N8.62 billion in

2007 to 150.9 million shares valued at N1.94 billion in 2007.

He said that the bulk of the transactions were in equities, which accounted for N2.08

trillion or 99.86% of the turnover value, up from the 99.6% recorded in 2006. He said further

that the transactions in the Industrial Loans sector accounted for N2.87 billion or 0.14%. He

opined that the Federal Government Development Stock sector and Preference Stocks

subsectors were inactive in 2007. According to him in 2006 turnover on Federal Government

bonds on the exchange stood at N1.6 billion. He said that Significantly, a turnover of N4.13

trillion in 30,182 deals was recorded in the Over-the-Counter (OTC) market for Federal

Government bonds, as against N624.81 billion in 5,448 deals recorded in that market in 2006.

He concluded that overall, the Exchange’s Turnover Ratio sustained its improvement,

rising from 14.7% in 2006 to 28.21% in 2007. The following is a list of the year’s 20 most

active stocks (by turnover volume);

1. Wema Bank Plc - 13.072 billion shares

2 Fidelity Bank Plc - 7.595 billion shares

3 First City Monument Bank Plc - 6.478 billion shares

4 First Inland Bank Plc - 5.867 billion shares

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5 Intercontinental Bank Plc - 5.281 billion shares

6 Lasaco Assurance Plc - 5.233 billion shares

7 Access Bank Plc - 4.492 billion shares

8. Transnational Corp of Nig Plc - 4.092 billion shares

9 Mutual Benefits Assurance Plc - 3.928 billion shares

10 Cornerstone Insurance Plc - 3.807 billion shares

11. International Energy Insurance Plc - 3.660 billion shares

12 United Bank for Africa Plc - 3.634 billion shares

13 Union Bank of Nigeria Plc - 3.598 billion shares

14 Afribank Nigeria Plc - 3.424 billion shares

15 Skye Bank Plc - 3.320 billion shares

16 Sterling Bank Plc - 3.241 billion shares

17. Guaranty Trust Bank Plc - 3.188 billion shares

18 NEM Insurance Co. Plc - 3.051 billion shares

19 Unity Bank Plc - 2.744 billion shares

20. Oceanic Bank International Plc - 2.541 billion shares

According to him the banking and insurance subsectors accounted for 19 of the Top

20 companies by turnover volume, as fallout of the recapitalization programme, which

boosted the available float in both subsectors and created the condition for block trades in the

shares of most of the listed banks. He revealed that another major factor was the directive by

the Central Bank that no state government should hold more than 10% equity interest in any

bank, which led to major divestment by some organization